On a quarterly basis, the U.S. Federal Open Market Committee (FOMC) updates its summary of economic projections (SEP), also known as the “Dot Plot.” We expect one or two FOMC participants, based on commentary in recent months, to be less dovish than in March, and that may ever-so-slightly shift the longer-term dots a notch higher too.

Slowly, the FOMC is moving the longer-term target higher. In part, it likely reflects the massive deficit funding supply and the recognition that labour market dynamics are lifting longer-term inflation expectations. As we have noted before, these shifts are glacial in nature and are likely more structural than cyclical.

The long-run median expectation is 2.5625 per cent and it could move up to 2.625 per cent with the 2025 dot moving up to 4.1 per cent from 3.875 per cent. The 2024 median dot is at 4.625 per cent and that could move up to 4.875 per cent.

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U.S. Federal Reserve Chair Jerome Powell, with only one real exception (Jackson Hole 2022), always tilts bullishly at his press conferences – but he’s a dove at heart.

If the May U.S. consumer price index (CPI) report is hotter than expected (we see these results the morning of the FOMC meeting), he will have difficulty tilting his comments on the dovish side. But a soft CPI will give him the cover to be the dove we know he wants to be and equity markets will likely respond positively.

Other aspects of FOMC policy are important too, but we do not expect any firm updates. Details on quantitative tightening (QT) and balance sheet normalization is important, but the FOMC has already said that it’s a 2025 thing and so we do not expect much on this front. Financial conditions (as seen in the chart) are too easy for FOMC and Powell to do anything but tilt hawkish.

The red line is the Aug. 26, 2022, Jackson Hole “pain” speech and the green line is the dovish pivot on Nov. 1, 2023, when the bond market was doing the heavy lifting already for the FOMC making financial conditions tighter.

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The Financial Conditions Index is a statistical combination of credit market spreads and levels (leverage), overall levels of interest rates, currency and equity performance along with other economic variables like home prices. Pre-COVID-19, a level above 101 is restrictive and below 99 is accommodative.

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