Federal Reserve Bank Chairman Jerome Powell testifies before the House Financial Services Committee at the Rayburn House Office Building on Capitol Hill in Washington, DC on March 6, 2024.
Chip Somodevilla | Getty Images
The Federal Reserve has a lot to do at its meeting this week, but ultimately may not do much to change the outlook for monetary policy.
In addition to releasing its interest rate decision after Wednesday’s meeting, the central bank will update its economic forecasts as well as its unofficial forecast for the direction of interest rates over the next few years.
With expectations for the Fed’s direction changing widely this year, this week’s two-day meeting of the Federal Open Market Committee will look carefully for clues about the direction of interest rates.
Still, the general view is that policymakers will stick with their recent messaging, which emphasizes a patient, data-driven approach and is in no rush to cut rates until inflation is more visible.
“They will make it clear that they are obviously not prepared to cut rates. “You need a few more data points to be confident that inflation is moving back toward target,” said Mark Zandi, chief economist at Moody’s Analytics. “I expect they will confirm three rate cuts this year, suggesting the first rate cut would come in June.”
Markets have had to adapt on the fly to the Fed’s approach, reducing both the timing and frequency of expected rate cuts this year. Earlier this year, traders in the Fed funds futures market expected the rate-cutting campaign to begin in March and continue until the FOMC cut the equivalent by six or seven times in quarter-percentage point increments.
Now the market has pushed back the timing to at least June, with only three cuts expected from the current 5.25% to 5.5% target range for the Fed’s federal funds rate.
The changing expectations will make it even more important how the central bank delivers its message this week. Here’s a quick look at what to expect:
The “dot plot”
Although the quarterly presentation of individual members’ expectations is somewhat arcane, this meeting will likely be all about the points. In particular, investors will be paying attention to how the 19 FOMC members, both voters and non-voters, will express their interest rate expectations through the end of the year and into 2026 and beyond.
When the matrix was last updated in December, the dots pointed to three cuts in 2024, four in 2025, three more in 2026 and then two more at some point to bring the long-term federal funds rate down to about 2.5% The Fed views it as “neutral” – neither encouraging nor restricting growth.
In purely mathematical terms, only two FOMC members would be needed to become more restrictive and reduce interest rate cuts to two this year. However, that is not the general expectation.
“It only takes two individual points moving up to increase the 2024 median. Three points is enough to push the long-term point up 25 basis points,” Citigroup economist Andrew Hollenhorst said in a note to clients. “But the combination of inconclusive activity data and slowing core inflation year-on-year should be just enough to keep the points in place [Fed Chair Jerome] Powell continues to believe the committee is on track to gain “greater confidence” to cut interest rates this year.”
The tariff call for March
Closer to home, the FOMC will hold a largely academic vote on what to do with interest rates now.
Simply put, there is no chance the committee will vote to cut rates this week. The last meeting’s statement all but ruled out an imminent move, and public statements from virtually every Fed spokesman since then have also ruled out a cut.
What this statement could potentially suggest is that the outlook is thawing and the bar that the data must overcome to justify future cuts is being adjusted.
“We still expect the Fed to cut rates in June, although we do not expect officials to cast a strong vote for or against,” wrote Paul Ashworth, chief North America economist at Capital Economics, after March -Meeting.
The economic prospects
Along with the Dot Plot, the Fed will release its quarterly update on the economy, particularly gross domestic product, inflation and the unemployment rate. Collectively, the estimates are referred to as the “Summary of Economic Projections” (SEP).
Again, there are not many expectations that the Fed will change its outlook from December, which reflected inflation cuts and a rise in GDP. The focus at this meeting will be on inflation and how it affects interest rate expectations.
“While inflation has stalled, economic data suggests the economy is not overheating,” Bank of America economist Michael Gapen wrote. “We still expect the Fed to forecast three rate cuts this year, but it is a very close call.”
Most economists believe the Fed could raise its GDP forecast again, although not dramatically, while potentially revising the inflation outlook somewhat upward.
big picture
More broadly, markets will likely wait for the Fed to follow its recent plan to cut — but still cut — interest rates this year. There will also be some anticipation about what policymakers will say about reducing their balance sheet. Powell has indicated that the issue will be discussed at that meeting and some details could emerge about when and how the Fed will slow and ultimately stop the drawdown of its bond holdings.
It won’t just be Wall Street watching, either.
Although this is not official policy, most central banks around the world take their cues from the Fed. When the Federal Reserve says it is proceeding cautiously because it fears inflation could rise again if it eases too soon, its global counterparts take notice.
As concerns about growth grow in some parts of the world, central bankers also want some sort of go-ahead signal. Higher interest rates tend to put upward pressure on currencies and increase the prices of goods and services.
“The rest of the world is waiting for the Fed,” said Zandi, the Moody’s economist. “They would prefer their currencies not to lose value and inflation to come under further pressure. So they would really like to see the Fed take the lead.”
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2024-03-19 21:51:54
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