After a protracted struggle to rein in escalating inflation, it is highly probable that the Federal Open Market Committee will maintain benchmark interest rates at a 23-year high of 5.25–5.5 percent.
Nevertheless, the degree to which Fed chair Jay Powell will allude to impending rate decreases remains uncertain. Although over half of investors are presently factoring in a shift at the March Fed meeting that follows, numerous experts predict that it will occur in late spring or early summer.
Concerning rate-setters is the possibility that a premature reduction will result in a resurgence of price pressures. Predictors of a later action argue that the US economy is sufficiently robust for the Federal Reserve to sustain elevated interest rates in order to offset this danger.
The fourth quarter witnessed an annualised growth rate of 3.3% in the gross domestic product, signifying a robust conclusion to a year when several forecasters anticipated a recession in the United States.
The annual growth rate was 3.1%, which ranked as the highest performance among major advanced economies.
“Since the beginning of the year, the data have provided no indication that the economy is in jeopardy,” said former Fed official and current Evercore ISI representative Krishna Guha.
“When it comes to going, policymakers have an immense amount of discretion. “Beginning later appeals to this desire for assurance that all is proceeding according to plan to return inflation to 2% over the long term,” he added.
Federal Reserve governor Christopher Waller expressed confidence this month that the central bank was “striking distance” from achieving its 2% inflation target, following a precipitous decline in price pressures during the latter half of 2023.
But he contended that due to robust economic expansion and a competitive labour market, officials were not compelled to take hasty actions. Waller stated, “I see no reason to move or cut as swiftly as I did in the past.”
According to Morgan Stanley economist Seth Carpenter, who predicts that the first cut would occur in June, various wagers on the timing of cutbacks reflect vastly different assessments of the US economy’s future.
“There are still some who believe a recession will occur in 2024,” Carpenter stated. “According to some, inflation is currently under complete control.”
“We anticipate a soft landing, but our position is not diametrically opposed to that of the markets,” he continued. “I anticipate that if we are incorrect in June, it will be due to the fact that cuts will occur earlier than our baseline, not later.”
Observers of the Federal Reserve believe that, barring an economic catastrophe, rate-setters will attempt to preemptively announce impending cuts at a meeting.
“If they are planning on March, I would anticipate Powell to give us a fairly good indication of that in January,” said Guha, who projects the first cut to occur in May or June as the most likely time.
In spite of this, others argue that Powell would be unable to provide a definitive indication of such a change this week, considering that headline US inflation increased from 3.1% in November to 3.4% in the previous month.
However, the indicator that the Federal Reserve is actively monitoring, core PCE inflation, declined to 2.9% annually in December.
Additionally, the Fed chair may be hesitant to rule out a cut on March 20 with absolute certainty, given that two additional sets of non-farm payrolls data, the most important indication of the US labour market, are expected to be released in the interval.
In addition, two sets of headline inflation figures and a PCE inflation report for January are anticipated prior to the March meeting. Data revisions that disclose the extent to which seasonal adjustments impacted the increase in December are also anticipated.
“Data flow will be of the utmost importance,” Carpenter predicted.
At the Fed meeting, the question of whether to slow quantitative tightening will also be discussed. At present, the monthly withdrawals of the US central bank amount to $35 billion in other government securities and $60 billion in US Treasuries.
Nonetheless, the December meeting minutes revealed that a number of attendees believed that the rate of QT should be reevaluated in the near future.
They said that the end of a period of plentiful liquidity could be initiated by a substantial decline in the utilisation of a facility by money market funds to purchase and sell Treasuries provided by the central bank.
Subsequent to that, Lorie Logan, former head of the New York Fed’s markets team and current president of the Dallas Fed, has observed that decelerating the rate of QT could reduce the likelihood of financing cost surges.
She stated that by avoiding those jumps, the Fed may continue to reduce its balance sheet without interruption for an extended period of time.
Former New York Fed head of domestic markets Nate Wuerffel, who is now at BNY Mellon, stated that officials would be compelled to make a choice sooner rather than later in 2019 due to large increases in funding costs during prior periods of quantitative easing.
“There is a concept of decelerating and subsequently halting [the depletion of assets] well before reserves decrease from plentiful to ample levels,” explained Wuerffel.
“They are discussing this because some policymakers have very strong memories of the 2019 crisis and they want to give the banking system time to adjust to lower levels of reserves.” “They are also cognizant of the fact that the data can only tell us so much about the future behaviour of money markets.”
