Inflation vs. Fed Decision: What's Driving Markets Next Week?

While closely related, US inflation and the Federal Reserve's interest rate decisions can impact the market with varying intensity. The Fed aims to avoid surprising the market, whereas inflation is unpredictable. Consequently, the market is confident that the Fed will neither hike nor cut rates at the upcoming meeting. However, inflation forecasts are often inaccurate. According to TradingEconomics, US inflation year-over-year is forecast to have stalled at 3.4%.

Last week, the personal consumption expenditures (PCE) price index remained steady at 2.8% in April for the second month in a row. This stability suggests that inflation may persist longer than expected, raising doubts about how soon the Fed can cut interest rates.

Traders currently see a 68% chance that the Fed will cut rates in September.

Interestingly, today the European Central Bank (ECB) announced a 0.25 percentage point cut in borrowing rates for the eurozone, the first decrease since 2019. The ECB’s main refinancing rate is now 4.25%, down from a record high of 4.50%.

With this rate reduction, the ECB follows the lead of the Swiss National Bank, Sweden’s Riksbank, and the Bank of Canada.

For the exact date and time of these major economic events, import the BlackBull Markets Economic Calendar to receive alerts directly in your email inbox.