sasirin pamai
Some day, the Federal Reserve’s monetary policy decisions may once again be like watching paint dry. We’re not there yet.
To be sure, very few see any chance that the Federal Open Market Committee will change the federal funds rate target range from its current 5.25%-5.50% level at the end of its meeting on Wednesday. As such, investors and economists will focus on when the Fed will start cutting rates. They’ll look for clues in the policymakers’ projections in the dot plot and in Chair Jerome Powell’s language during his post-meeting press conference.
In September’s Summary of Economic Projections (“SEP”), the median projection for the fed funds rate was 5.1% at the end of 2024, implying one rate cut from the current level of about 5.3.%
Wells Fargo Investment Institute’s Brian Rehling, head of Global Fixed Income Strategy, pointed out in a recent note that markets are expecting four or five 25-bp rate cuts in 2024, a significant disconnect from the Fed’s last SEP. “Therefore, in our view, either market expectations or Fed policy messaging will have to adjust in the future,” he wrote.
The Fed may seek to damp investor enthusiasm for rate cuts, wrote SA Investing Group Leader Lawrence Fuller. “If they lower the projection back to the June level of 4.6%, I can see long-term rates rise and stocks decline, but I think both would be short-term counter trend moves that would help to resolve the overbought condition in stocks and bonds before year end,” he said.
SA Investing Group Leader Dan Victor is also thinking along those lines in terms of monetary policy, expecting the dot plot to signal three rate cuts in 2024.
Still, he’s not expecting a dramatic stock selloff. “Just because the market is expecting five rate cuts in 2024, but the Fed ends up saying just three or four cuts, is not a reason for stocks to ‘crash’ on Wednesday,” he wrote. While there may be some volatility, “the real story will be some confirmation the possibility of the looming policy pivot is real,” he said. “What’s more important is that inflation continues to trend lower and the economy remains resilient.”
The FOMC members will also provide their expectations for other major economic measures over the next couple of years. In the prior SEP, the median projection for the core PCE inflation rate was 3.7% for year-end 2023, 2.6% for YE 2024, and 2.3% for the following year. The median projection for the unemployment rate edged up to 4.1% at the end of both 2024 and 2025. That compares with 3.7% in the Labor Department’s December jobs report.
David Russell, global head of market strategy at TradeStation, will be listening for a change in language to see how confident the FOMC is regarding its control of inflation. “From my perspective, we’ll know we have a soft landing when the Fed believes inflation is done and gives a sense that they are no longer wanting to be restrictive,” he said in a recent interview.
He had expected a Q1 rate cut. But after Tuesday’s CPI print showing an increase in used vehicle and housing prices, he said: “A March rate cut may now require more substantial slowing in the real economy and labor market. The Fed might get more dovish if retail sales fall short on Thursday or employment numbers weaken early in the New Year. But otherwise, Jerome Powell could think it pays to wait.”
Fitch Ratings believes the first cut is more likely at the end of July. Olu Sonola, head of U.S. regional economics at the company, expects four straight 25-bp rate cuts, totaling 100 bps of cuts in 2024. While it’s possible the FOMC starts to cut in March and moves every other meeting, “we think it’s more likely they will hold through June just to be absolutely sure that the 2% inflation is entrenched.”
The Fed likely wants to see a few more months of jobs data and inflation data before pivoting to cuts, Sonola explained.