The Federal Reserve’s Open Market Committee (FOMC) meets again next week. Some months ago, market analysts were 50/50 on a bet regarding a decrease in short-term rates at the Fed’s June meeting. Then came some very strong jobs reports and also some stronger-than-expected inflation news, causing the odds to drop below 25%. There have been plenty of statements by Fed members cautioning that rates will have to stay higher for longer –

Fed Chair Jerome Powell reiterated May 14 that inflation is falling more slowly than expected, likely keeping interest rates elevated for an extended period…CNBC

That statement was made one day before the April Consumer Price Index was released. That data showed some improvement in the inflation picture, though the improvement was minimal. This was followed by the Fed’s favorite inflation index released last week showing that inflation was stable at a level higher than the Fed’s target. Thus, we had a more moderate jobs report in early May. This was followed by a slight improvement in the inflation trend.

What if the economy added a small or even a moderate amount of jobs in May when the employment report is released on Friday? Would that be enough for the Fed to reverse course? We doubt that would be the case. However, it might be enough for the Fed to soften their “higher for longer” language. If this happens, then the end of July meeting of the FOMC could put a rate decrease in play – if we continue to get some good inflation news. The next Consumer Price Index is to be released on the second day of their meeting next week. The period from this Friday to the end of next Wednesday should be interesting.