The Federal Reserve is anticipated to maintain interest rates for the fourth consecutive meeting, holding the range at 5.25% to 5.5%, according to the Federal Open Market Committee’s (FOMC) two-day policy meeting ending Wednesday. While a rate cut is not expected to be signaled imminently, recent declines in inflation have stirred speculation about the central bank’s future actions.
The decision, set to be disclosed at 2 p.m. in Washington, will be followed by a press conference led by Chair Jerome Powell half an hour later. Investors currently perceive a 40% chance of a rate cut in March, approximately eight months after the last rate hike. However, Powell is likely to express satisfaction with the recent inflation downtrend, emphasizing the robust labor market and strong economic growth as factors influencing the decision to hold off on rate cuts for now.
Seth Carpenter, Chief Global Economist at Morgan Stanley, noted the significant drop in inflation, stating, “You can’t deny the fact that inflation has come down a lot, and I don’t think they want to. On the other hand, I don’t think there’ll be a big banner up that says ‘Mission Accomplished.'”
The preferred gauge of underlying inflation, excluding food and energy, witnessed a 1.9% increase on a six-month annualized basis in December, falling short of the Fed’s 2% target for the second consecutive month.
Bloomberg Economics suggests that the primary focus of the January FOMC meeting will be on laying out plans for communication regarding potential rate cuts and the tapering of Quantitative Tightening. If rate cuts are initiated in March, as Bloomberg Economics anticipates, definitive communication may come from Powell’s Humphrey-Hawkins testimony in late February or early March.
The FOMC might adjust its guidance on interest rates during this meeting, possibly dropping a reference to a potential “firming” of rates in favor of a more neutral term like “stance of policy.” The statement is expected to resemble the one published in December, with a reaffirmation of long-term goals and monetary policy strategy.
During the press conference, Powell is likely to face questions about the possibility of rate cuts in March and the relevance of the committee’s median forecast from December, which predicted three quarter-point reductions this year. Investors currently anticipate five or more cuts.
While there is speculation about the risk of re-acceleration in inflation later this year, Powell may push back against immediate rate changes, given the potential complications of reversing course. Diane Swonk, Chief Economist at KPMG LLP, emphasized the importance of staying the course during this phase.
Apart from interest rates, the FOMC may discuss its $7.7 trillion balance sheet and the potential tapering of its quantitative tightening program. The central bank may need to address the pace of shrinking its portfolio of assets, considering scarcer liquidity in financial markets.
As the January meeting brings a rotation of new voters among the central bank’s regional presidents, including some with a potentially more hawkish stance, no dissents are expected at this meeting. The decisions made in this meeting and the communicated outlook will be closely scrutinized for insights into the Fed’s strategy amidst evolving economic conditions.
