At the beginning of the year, there was a strong expectation in the market for a rate cut in March, with odds as high as 80%. However, the situation has shifted due to a surge in inflation and questionable job reports from the Biden administration, leading to a decrease in the likelihood of easing by the Fed. As a result, it's widely anticipated that the Federal Open Market Committee (FOMC) will maintain interest rates at their current levels of 5.25-5.50% not only in March but also in May.
Rather than anticipating any changes from Fed Chair Powell, who surprisingly leaned towards a dovish stance in December by suggesting a potential rate cut, the market will closely watch the Dot Plot accompanying the FOMC meeting. There's a risk that the Fed might change its stance again, this time towards a more hawkish approach, with projections possibly reflecting fewer rate cuts than previously expected, in response to recent inflation and economic growth data. Additionally, attention will be on discussions regarding the tapering of quantitative tightening (QT), which the Fed hinted at earlier and which needs to commence soon if rate cuts are to be considered in June.
Money markets have adjusted their expectations towards a more hawkish stance, aligning with the Fed's forecast of three rate cuts in 2024. However, there's still implied uncertainty regarding a rate cut until July, with a significant likelihood of a cut in June. Goldman Sachs suggests there's a possibility of an upward revision in the neutral rate forecast. Powell is expected to remain cautious about specifying the timing of rate cuts, especially after the recent inflation data, although it's anticipated that discussions about tapering the balance sheet runoff will be acknowledged.
In terms of consensus expectations, economists predict the Fed will keep rates unchanged in the short term, with a potential rate cut in June. Changes to the Fed's statement are expected to be minimal, reflecting the recent economic data. The Dot Plot is anticipated to show a median rate forecast for 2024 remaining unchanged, although there's a possibility it might increase slightly. Despite signs of softening in economic activity, the FOMC may not drastically alter its longer-term rate expectations. Discussions about tapering the balance sheet runoff are expected to gain more prominence, with a formal announcement possibly in June.
Chair Powell's statements are likely to echo previous sentiments, emphasizing that policy decisions will depend on observable data rather than speculative parameters. Market reactions are anticipated to be moderate, with factors like momentum stocks sensitive to any unexpected dovish signals from the Fed.
Overall, while there's been a shift in market expectations regarding rate cuts, tomorrow's FOMC meeting is not expected to prompt significant changes in market dynamics, barring any unexpected dovish signals from the Fed.
Comments