What to expect from the Federal Reserve’s policy meeting on Wednesday

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By journalsofus.com


Federal Reserve Bank Chairman Jerome Powell testifies before the House Financial Services Committee at the Rayburn House Office Building on Capitol Hill on March 06, 2024 in Washington, DC.

Chip Somodevilla | getty images

The Federal Reserve has a lot to do at its meeting this week, but ultimately won’t get much done in terms of changing its monetary policy approach.

In addition to releasing its rate decision after the meeting ends on Wednesday, the central bank will also update its economic projections as well as its informal forecast for the direction of interest rates over the next several years.

As expectations run high about where the Fed is heading this year, the two-day session of the Federal Open Market Committee this week will be carefully scrutinized for any clues about the direction of interest rates.

Yet the general sentiment is that policymakers will stick to their recent messaging, which has emphasized a patient, data-driven approach with no rush to cut rates until there is more visibility on inflation.

“They’ll make it clear they’re clearly not ready to cut rates. They need a few more data points to be confident that inflation is getting back on target,” said Mark Zandi, chief economist at Moody’s Analytics. ” “I expect they will reaffirm three rate cuts this year, suggesting the first rate cut will be in June.”

Markets have had to adjust to the Fed’s approach, reducing both the timing and frequency of expected cuts this year. Earlier this year, traders in the Fed funds futures market were expecting the rate-cutting campaign to begin in March and continue unless the FOMC cuts quarterly rate increases by as much as six or seven times .

Now, the market has extended the time to at least June, expecting only three cuts for the Fed’s benchmark overnight lending rate from its current target range of 5.25%-5.5%.

The change in 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:

‘Dot Plot’

Although the quarterly story of individual members’ expectations is quite mysterious, this meeting will likely be based on all points. Specifically, investors will be watching how the 19 FOMC members, both voters and non-voters, will indicate their expectations for rates through the end of the year and into 2026 and beyond.

When the metrics were last updated in December, the dots pointed to three cuts in 2024, four in 2025, three more in 2026, and then at some point a reduction in the long-range federal funds rate to around 2.5%. The Fed pointed to two more cuts to lead to growth that it considers “neutral” – neither promoting growth nor restricting it.

Morgan Stanley's Ellen Zentner says the Fed will likely end up with a mean of three cuts this week

Doing the math, it would only take two FOMC members to be more aggressive in reducing rate cuts to two this year. However, this is not a common expectation.

“It only takes two separate points to push the 2024 mean higher. Three points is enough to push the long-run point up 25bp,” Citigroup economist Andrew Hollenhorst said in a client note. ” “But the combination of inconclusive activity data and year-on-year slowing core inflation should be just enough to put the points in place and [Fed Chair Jerome] Powell is still guiding that the committee is on track to gain ‘greater confidence’ to cut policy rates this year.”

rate call for march

Immediately, the FOMC will hold a massive academic vote on what to do with rates now.

Simply put, it is unlikely that the committee will vote to cut rates this week. The statement from the last meeting rejected any imminent move, and public statements from nearly every Fed speaker since then have also rejected a rate cut.

What this statement may indicate is perhaps a reduction in outlook and the level of adjustment that will need to be done to clean the data to justify future cuts.

“We still expect the Fed to cut interest rates in June, although we do not expect officials to make any strong moves for or against,” wrote Paul Ashworth, chief economist for North America at Capital Economics.

economic outlook

Along with the “dot plot”, the Fed will release its quarterly update on the economy, specifically GDP, inflation and the unemployment rate. Collectively, the projections are known as the Summary of Economic Projections, or SEP.

Again, there are not many expectations that the Fed will change its outlook from December, indicating a cut in inflation and an upgrade of GDP. This meeting will mainly focus on inflation and how it affects rate expectations.

“While inflation has come back on track, activity data suggests the economy is not overheating,” Bank of America economist Michael Gapen wrote. “We think the Fed will still anticipate three cuts this year, but it’s a very close call.”

Most economists believe the Fed could raise its GDP forecast again, though not dramatically, while possibly raising the inflation outlook a little higher.

big picture

On a broader scale, the market will probably be expecting the Fed to follow through on its recent plan for fewer cuts this year – but cuts nonetheless. There will also be some anticipation on what policymakers say about its balance sheet reduction. Powell has indicated that the issue will be discussed at this meeting, and some details may emerge as to when and how the Fed will slow and eventually stop cutting its bond holdings.

It won’t just be watching Wall Street.

Although not an official policy, most central banks around the world take cues from the Fed. When the U.S. central bank says it is moving cautiously because it fears inflation could spike again if inflation is eased too soon, its global counterparts take notice.

With concerns rising about growth in some parts of the world, central bankers are also looking for some sort of signal. Higher interest rates put pressure on currencies and raise the prices of goods and services.

“The rest of the world is waiting for the Fed to do its thing,” said Zandi, the Moody’s economist. “They would like their currencies not to decline in value and put further pressure on inflation. So they would really like the Fed to start moving in that direction.”

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