Fed Meeting Preview: Is A March Rate Cut Likely?

There’s little doubt that the Federal Reserve Open Market Committee (FOMC) meeting this Wednesday will opt to maintain interest rates unchanged within the 5.25% to 5.5% range while also keeping their quantitative tightening program running at the same pace.

But, the real focus lies in the million-dollar question of what the Fed’s next move will be, particularly in March, and whether they are comfortable with the aggressive rate cuts that market participants are anticipating.

Markets are placing a 50% chance of a rate cut as soon as March, and they factor in six cumulative rate cuts of 25 basis points each by the end of the year, according to CME Group FedWatch tool.

The S&P 500 Index, monitored through the SPDR S&P 500 ETF Trust SPY, is approaching this crucial event while trading at fresh record highs amid speculations of rate cuts.

All eyes will be on Federal Reserve Chair Jerome Powell’s upcoming press conference at 2:30 p.m. ET on Wednesday, where hopefully the public will gain deeper insights into the Fed’s outlook on interest rates.

Ahead of January’s FOMC meeting, here’s how market participants and economists are evaluating the possible scenarios that could unfold.

Economic Strength Gives Powell Leeway To Hold For Longer

Stock market analyst Ed Yardeni anticipates there won’t be any adjustments to the federal funds rate during the upcoming meeting. Powell is expected to counter the market’s inclination toward earlier rate cuts by pointing out that financial conditions have improved and the economy has demonstrated greater strength than initially projected, partly due to increased productivity.

The U.S. GDP grew by 3.3% in the fourth quarter of 2023, sharply outpacing forecasts of a 2% growth. However, the Fed’s preferred inflation gauge came in slightly below expectations in December, pushing several economists to project upcoming rate cuts.

According to ING Group’s analysis, a March interest rate cut is unlikely due to strong economic growth and a tight job market.

But the Dutch banking and financial services company anticipates the Federal Reserve will eventually implement significant interest rate cuts at a later stage. The company believes the Fed will opt to wait until May before making its first move in this direction.

The basis for this confidence comes from the continued low levels of core inflation, which they believe will provide the Fed with the assurance needed to reduce the policy rate to 4% by the end of the year. This projection differs from the consensus forecast of 4.5%. ING Group also foresees the policy rate reaching 3% by mid-2025.

“If the economy does enter a more troubled period and the Fed needs to move into ‘stimulative’ territory there is scope for much deeper cuts,” James Knightley, chief international economist at ING Group, wrote.

ING also emphasized that if the press statement continues to mention the possibility of rate hikes, it may not be viewed as credible by the markets.

JPMorgan Chase expects the FOMC to take a neutral stance in their upcoming meeting, without leaning towards tightening or easing monetary policy. They anticipate that Powell will clarify that rate cuts were not considered during this meeting, with the focus solely on actions for the present, rather than preemptive decisions for the future.

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The Fed’s Old Adage

According to Bank of America, it anticipates the first rate cut from the Federal Reserve to occur in March. However, it does not perceive any strong signals pointing towards such a move in January.

The company believes the Federal Reserve will adopt a cautious approach and may choose to “buy time” by waiting for more economic data to become available before making any significant decisions.

"The old adage is the Fed never surprises on hikes but is perfectly willing to surprise on cuts," Bank of America wrote.

‘Impossible Not To Sound Ultra Dovish’

Joseph Brusuelas, chief economist at RSM, expects the January meeting will reaffirm the Federal Reserve’s stance of being patient and on hold when it comes to rate cuts.

Powell faces the challenge of balancing the need to provide forward guidance to the investment community, which is eagerly awaiting signals on inflation and policy changes, with the public’s expectations of higher inflation.

However, “it will be near impossible for Powell not to sound ultra-dovish given the underlying dynamics of easing inflation, solid growth and the improvement in wages and hiring,” Brusuelas stated.

Inflation Slowdown Makes Policy Already Too Restrictive

In an interview with Market News (MNI), Joseph Tracy, a former senior adviser to the president at the Dallas Fed, suggests monetary rules of thumb indicate the Federal Reserve would be well-positioned to initiate interest rate cuts in March.

According to Tracy, based on economic indicators such as the natural rate of unemployment and underlying inflation, a 25 basis point rate cut in March aligns with these rules.

“This puts a 25 basis point cut on the table for March. If I wanted to take out a little insurance against the geopolitical risks, I would lean toward taking the cut in March rather than waiting,” Tracy said.

He emphasizes the importance of data dependence and having a clear benchmark that can be communicated to the markets, especially during times of complexity and uncertainty in monetary policy.

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Photo: Courtesy Federal Reserve