The Federal Open Market Committee convenes Wednesday morning in Washington for a two day meeting that markets are pricing as the most contested rate decision in over a decade. Federal funds futures put the probability of a rate hold at the current 4.25 to 4.50 percent target range at 92 percent for the May meeting itself. The June meeting carries a 64 percent probability of a quarter point cut. Both numbers are unusual against a backdrop of three governor dissents at the prior meeting and a public split among committee members that Chairman Jerome Powell has described as the widest of his tenure.
Powell will deliver his post meeting press conference Wednesday at 2:30 p.m. Eastern Time. The statement and updated economic projections release at 2:00 p.m. Markets will be reading carefully for any change in language describing the inflation outlook, the labor market, and the path of future rate decisions. The dot plot in the Summary of Economic Projections will show how individual committee members see the federal funds rate ending 2026 and 2027.
The economic data the committee is weighing tells a mixed story. The April nonfarm payrolls report released Friday showed 140,000 jobs added against a consensus of 178,000. The unemployment rate held at 4.3 percent. Average hourly earnings rose 3.6 percent year over year, the slowest pace since 2021. The combination suggests a labor market that is no longer overheating but has not collapsed.
Inflation data has been less cooperative. The March personal consumption expenditures index, the Fed's preferred measure, came in at 2.8 percent headline and 3.1 percent core. Both numbers are above the committee's 2 percent target and have been stuck in this range for over six months. The April CPI report scheduled for May 13 will be the next inflation reading available before the June meeting and will likely determine whether the cut markets are pricing actually arrives.
Oil prices have complicated the inflation picture. Brent crude closed Tuesday at $112.90 per barrel, down from a peak of $114.44 on Monday but still up roughly 14 percent over the past three weeks following escalating tensions around the Strait of Hormuz. The Fed traditionally looks through energy price spikes when setting policy. Several committee members have publicly warned that a sustained move above $115 would change that calculation, particularly given the existing core inflation stickiness.
The labor market data carries particular weight for Black communities and lower wage workers, where unemployment rates run consistently above the headline number. The April Black unemployment rate stood at 6.2 percent against a national 4.3 percent. The gap has widened slightly over the last six months as job growth has concentrated in higher wage sectors. Economists at the Roosevelt Institute and the Joint Center have urged the committee to weight unemployment dynamics more heavily relative to inflation given the disparate impact of restrictive policy on these communities.
Mortgage rates remain a sore point for first time and minority homebuyers. The thirty year fixed conventional rate sits at 7.25 percent as of May 5, the highest level in the current cycle. FHA rates run roughly twenty basis points higher. National Association of Realtors data shows first time buyer share of existing home sales dropped to 26 percent in March, the lowest since 1981. A 25 basis point cut at the June meeting would likely flow through to mortgage rates within thirty days.
The dissent landscape deserves attention. At the April 29 meeting, three governors voted against the hold, all preferring an immediate quarter point cut. That was the largest number of dissents since 1992. Powell, whose term as chair ends May 15 and who is staying on the Board as a voting member, has aligned with the hold majority but not ruled out a June cut.
What to watch in the statement and projections. First, the language describing the labor market. If the statement upgrades concern about employment relative to inflation, that signals a June cut is more likely. Second, the median dot for end of 2026. A move down from 3.875 to 3.625 percent would imply two cuts this year. Third, any change to the description of inflation. Fourth, Powell's tone in the press conference, which has typically shaded slightly more dovish than the formal statement.
Markets enter Wednesday with the S&P 500 near record highs at 7,259, the ten year Treasury yield at 4.39 percent, and the dollar index at 96.8. A statement that confirms a June cut without explicitly committing to it is the consensus expectation. Anything more hawkish risks a sharp equity selloff. Anything that explicitly commits to a near term cut would send rate sensitive sectors including REITs and small caps higher. A neutral hold that pushes the cut out to July would be the worst outcome for risk assets, extending restrictive policy without a clear catalyst.
