The impact of both the Fed meeting and inflation report, which were released on Wednesday, could be enormous.

• The consumer price index for May will be released in the morning, followed by the Fed's policy meeting in the afternoon on Wednesday.
• Although economists anticipate a 0.1% increase in CPI from April, this would still result in an overall annual increase of 3.4%. Core PCI is expected to have a 0.3% monthly increase and a 3.5% annual rate.
• Although the Fed will not take any action regarding interest rates, officials will provide updates on economic forecasting, including the "dot plot" of interest rate projections.

This Wednesday promises to be a crucial day for the economy, with investors eagerly awaiting updates on inflation and the Federal Reserve's response.

The consumer price index reading for May and the Fed's policy meeting in the afternoon will provide crucial information about the direction of the economy and whether policymakers can lift their economic restrictions.

UBS economist Jonathan Pingle wrote that the day contains "months of macro risk in one day."

Pingle anticipates that the CPI report, along with the recent nonfarm payrolls reading and other data releases, will prompt Fed officials to adjust their forecasts for inflation, economic growth, and interest rates.

Market participants' nerves are not significantly affected by the moves, as optimists believe they are within the expected outcomes range.

According to Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, both events are likely to have minimal impact on the market due to his expectations of mild outcomes.

In broad strokes, here are anticipated outcomes of both events.

CPI inflation

In May, the cost of a broad basket of goods and services for consumers is predicted to have minimal month-to-month change, with a 0.1% increase from April. Despite this, it would still represent an overall annual increase of 3.4%.

The projected monthly gain for the core PCI is estimated to be 0.3%, while the annual rate is projected to be 3.5%.

Despite the fact that the numbers are not significantly different from the April readings, inflation remains above the Fed's 2% target. However, some economists believe that examining various important metrics, such as insurance costs and core services excluding housing, will reveal that inflation is moving in the right direction, albeit at a slow pace.

Janasiewicz stated that the inflation trend will likely continue, as there is evidence of a broader disinflationary trend and the first quarter data was just a temporary pause in a downtrend.

The CPI, while widely discussed among investors and the public, is not the primary metric used by the Fed. Instead, central bankers prefer the Commerce Department's measure of personal consumption expenditures prices, which takes into account changes in consumer behavior and is a broader indicator of inflation.

The CPI report will be made public by the Bureau of Labor Statistics at 8:30 a.m. ET on Wednesday.

The Fed meeting

As the BLS releases the CPI report, the Federal Open Market Committee members will be finalizing their inflation, GDP, and unemployment projections, as well as indicating the expected rate path through 2026 and beyond.

The Fed will not make any changes to interest rates, as both market pricing and policymakers' rhetoric indicate a low chance of a move either way. The central bank will keep its benchmark overnight borrowing rate within the range of 5.25%-5.50%.

Instead, officials will take other action that markets will be watching closely.

The FOMC will provide quarterly updates to their Summary of Economic Projections, with the normal deadline for making changes being 9 a.m. Wednesday. However, the 19 meeting participants may have some extra time to consider the CPI report.

The market consensus is that the Fed will adjust the "dot plot" upward, which may result in fewer than three interest rate cuts in 2024, with most economists predicting two cuts, but there is concern that the outlook could shrink to just one.

If the Fed signals a rate cut, it is likely that the Fed will not act until November or December, according to UBS' Pingle.

Goldman Sachs economists predict two rate cuts, with the first occurring in September. However, other experts differ, with Bank of America forecasting one cut and Citigroup anticipating a possible three. Despite this, it is expected that the dot plot will indicate two rate cuts.

Goldman economist David Mericle wrote that our conviction remains limited because we continue to view cuts as optional, the inflation news we anticipate would make a decision to cut reasonable but not obvious, and FOMC participants have a range of views.

The Fed's outlook for GDP growth and inflation expectations are likely to be revised by economists.

The post-meeting statement and Chair Jerome Powell's news conference were also significant Fed developments.

According to Mericle, we anticipate no substantial alterations to the FOMC statement or Chair Powell's message at the June meeting. The main topic of Powell's May press conference was his opposition to potential rate increases, but this topic has been less prominent in markets since then.

A small number of Fed officials have publicly discussed the possibility of increasing interest rates even further.

Traders earlier predicted six interest rate cuts in 2024, but the market has forced them to adjust their expectations.

The upcoming CPI report is expected to reflect the recent economic data, which suggests that the possibility of higher-for-longer interest rates is being increasingly viewed as a viable option. Additionally, the payrolls report from Friday revealed that wages were growing at an annual rate of 4.1%, which is higher than the Fed's desired rate.

"According to Nicholas Colas, co-founder of DataTrek Research, the U.S. economy, which is still expanding, is preventing wage growth from falling below the Federal Reserve's unofficial target of 3.3 percent. If economic growth slows down, it will be challenging to achieve a significant Fed rate cut in 2024."