With today’s lukewarm jobs report, investors are anxiously awaiting next week’s crucial Federal Open Market Committee (FOMC) meeting set for Wednesday, June 12. Indeed, the results of the June policy meeting will likely set the stage for the market going forward. Will the stock market crash?
Well, probably not.
This time around it’s less about the actual interest rate decision — most analysts have already priced in no change to rates this month — and more about the tone that the Federal Reserve and Fed Chair Jerome Powell adopt at the meeting.
Wall Street has been hoping for rate cuts all year, to no avail so far. Stubborn inflation, combined with a relatively tight labor market, has given the central bank little incentive to take its foot off the brakes. As it stands, many investors are anchoring their expectations that the Fed will issue its first rate reduction in September.
Today’s jobs report did little to help the cause on that front. The U.S. economy added 270,000 jobs in May, substantially more than the 180,000 economists had forecast. That said, the unemployment rate actually increased slightly to 4%, the highest level since January 2022.
This paints an unclear picture of the current unemployment situation as it pertains to the Fed. While expanding payrolls would generally support continued hawkish monetary policy, the increasing unemployment rate is still notable.
“Accelerating pay growth could be a sign of inflationary pressures ready to rebound if the Fed takes their foot off the brake,” said Bill Adams, Chief Economist for Comerica Bank. “On the other hand, higher unemployment could signal weaker wage growth ahead, softer consumer demand, and less pricing power for businesses, which would cool inflation.”
Stock Market Crash Fears Swirl Ahead of Crucial CPI Release Before FOMC
Interestingly, the FOMC isn’t the only major economic event next Wednesday. The May Consumer Price Index (CPI) inflation report releases in the morning ahead of the interest-rate decision, likely by no coincidence.
With inflation taking a modest step back last month, the May CPI will offer the first indication of whether there’s an underlying disinflationary trend taking root in the economy, or if prices — and likely interest rates — will continue to hover higher than preferred heading into the second half of the year.
According to CPI Nowcasts, inflation is expected climb 0.08% in May. This is actually a notably low monthly increase, but it’s mostly attributable to easing oil prices. Fed-preferred core inflation, which excludes food and energy, is projected to climb 0.3% in May.
Should the report prove accurate, it would likely paint a relatively neutral picture for inflation. A 0.3% gain is in-line with April’s CPI reading, which itself was the first reprieve after several months of 0.4% monthly inflation gains.
At a core increase of 0.3%, Wall Street will continue to maintain belief in at least one rate cut this year. Should the figure end up being closer to 0.4%, expect Wall Street to respond dramatically, as aspirations of a rate reduction take a brutal hit to the chin.
Regardless, expect the CPI to be a focal point of the FOMC meeting on Wednesday. The tone Powell takes on the data will likely illuminate Wall Street’s rate cut expectations going forward.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
