Federal Reserve Chairman Powell testifies before the House Financial Services Committee at the Rayburn House Office Building on Capitol Hill in Washington, DC, on March 6, 2024.
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The Fed has a lot to do at this week’s meeting, but may not ultimately do much to change the outlook for monetary policy.
In addition to releasing a rate decision after Wednesday’s meeting, the central bank will also update its economic forecasts and informal forecasts of where interest rates will go in the coming years.
With expectations for the Fed’s direction swinging wildly this year, the Federal Open Market Committee’s two-day meeting this week will scrutinize any clues about the direction of interest rates.
However, the general feeling is that policymakers will stick to their recent messaging, which has emphasized a patient, data-driven approach and not rush to cut rates until inflation is more evident.
“They’re going to make it clear that they’re clearly not ready to cut rates yet,” said Mark Zandi, chief economist at Moody’s Analytics. “They need more data points to be confident that inflation is back on target.” “I expect They’re going to reiterate three rate cuts this year, so that means the first rate cut will be in June.”
The market had to quickly adapt to the Fed’s approach, scaling back the timing and frequency of expected rate cuts this year. Earlier this year, traders in the federal funds futures market expected rate cuts to begin in March and continue until the FOMC cuts rates six to seven times in quarter-percentage increments.
Now, the market has postponed the rate cut until at least June, and it is expected that the Federal Reserve’s benchmark overnight borrowing rate will only cut interest rates three times from its current target range of 5.25%-5.5%.
The expected volatility will make how the central bank delivers its message this week even more important. Here’s a quick look at what to expect:
“Point Picture”
Although the quarterly figures expected by individual members are rather mysterious, this meeting is likely to be all about the dots. Specifically, investors will be watching to see how the 19 FOMC members, including voters and non-voters, express their expectations for interest rates by the end of this year and in 2026 and beyond.
Doing the math, it only takes two FOMC members to become more hawkish to reduce the number of rate cuts this year to two. However, this is not a universal expectation.
“It only takes two separate points higher to lift the 2024 median,” Citigroup economist Andrew Hollenhorst said in a client note. “Three points would be enough to lift the long-term point.” pushed up 25 basis points.” “But the combination of uncertain activity data and slower year-over-year core inflation should be enough to keep the point in place, and (Fed Chairman Jerome) Powell remains steering the committee on track to get the green light to cut policy. ‘Greater confidence’ in rates this year.”
March interest rate adjustment
More immediately, the Federal Open Market Committee will hold a largely academic vote on how to handle interest rates now.
In short, there is zero chance the committee will vote to cut interest rates this week.Statements from the last meeting all but ruled out imminent action, and Since then, almost all public statements by Fed spokespeople have also ruled out the possibility of a rate cut.
The statement could signal that the outlook is thawing and that data will need to clear to justify future rate cuts.
Paul Ashworth, chief North America economist at Capital Economics, wrote, “We still expect the Fed to cut interest rates in June, although we do not expect officials to provide support or support after the March meeting. Strong guidance against opposition”.
economic prospects
In addition to the “dot plot”, the Fed will also release quarterly economic updates, specifically gross domestic product, inflation and unemployment. Collectively, these estimates are called Summary Economic Projections (SEP).
Likewise, there are not many expectations for the Fed to change its outlook starting in December, reflecting lower inflation and an upgrade in GDP. The focus of this meeting will be squarely on inflation and how it affects interest rate expectations.
“While inflation has hit a snag, activity data suggests the economy is not overheating,” Bank of America economist Michael Garpen wrote. “We think the Fed will still forecast three rate cuts this year, but this is a very close one. .”
Most economists believe the Fed is likely to raise its GDP forecast again, albeit not significantly, and may raise its inflation outlook slightly.
overall view
More broadly, markets may expect the Fed to follow its recent pattern of fewer rate cuts this year but still cut rates. There will also be some expectations for what policymakers will say about their balance sheet reductions. Powell said the issue will be discussed at this meeting, and some details may emerge on when and how the Fed will slow down and eventually stop reducing its bond holdings.
It’s not just Wall Street’s concern, either.
Although not official policy, most central banks around the world take their cues from the Fed. When the U.S. central bank signals it is taking cautious action due to concerns that inflation could spike again if it eases too early, global peers take notice.
As worries about economic growth in some parts of the world escalate, central bankers also want to signal some type of action. Higher interest rates tend to put upward pressure on currencies and make goods and services more expensive.
“The rest of the world is waiting for the Fed,” said Zandi, an economist at Moody’s. “They don’t want their currencies to depreciate and put further upward pressure on inflation. So they really, really want the Fed to start taking the lead.”
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