Ahead of today’s FOMC meeting, interest rates are expected to hold steady at current levels, as data indicates that inflationary pressures remain above the Federal Reserve’s target rates. These pressures are gauged through CPI, which recorded an annual increase of 2.8%, slightly converging with market expectations that forecasted a 2.9% annual rate. This data provided a marginal upside to U.S equities last week. On the other hand, PCE, the Fed’s preferred gauge for inflation, points to a 2.6% level, reflecting an overshoot of the official target of 2%. The labor market continues to exhibit robust health with 151,000 new jobs last month, although these figures were slightly below expectations of 160,000 jobs. The unemployment rate remains steady at 4.1%, reinforcing a sustainable job market image.

Current forecasts reflect a slowdown in growth prospects, with estimates suggesting GDP growth below 2%, compared to 2.4% at the start of the year. The UMich survey highlighted a sharp decline in consumer confidence to lowest since 2022, reflecting consumers’ hesitancy to spend and their heightened inflation fears. Despite understood criticisms of the Michigan surveys due to political biases, the data remain significant indicators of major economic trends and their potential impact on the stock market. Future forecasts for inflation and economic growth, depicted in the Fed’s ‘Dots’, will attract increasing attention among market participants, as markets do not anticipate an interest rate cut, but policymakers will provide an outlook that could alleviate uncertainties. The dots indicate the individual expectations of FOMC members on the path of monetary policy, thus offering valuable indicators about interest rate trends and economic growth assessments over the medium and long term.

Tariff policies remain a significant factor threatening growth, given their direct impact on personal spending and consumer confidence. Simultaneously, fiscal policy, particularly the delay in tariffs and potential tax cuts, could provide some economic support. These dynamics carry important signals for investors monitoring markets, knowing that US exceptionalism is expected to face challenges in the second and third quarters of the year, especially with the emergence of investment alternatives in the European defense sector and Chinese AI, which offer decent diversification for investment portfolios in the current environment.By Ahmad Assiri Research Strategist at Pepperstone

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