Markets are on edge this week as Fed officials prepare to signal whether they believe three rate cuts in 2024 are still likely.
That new forecast Wednesday will be released in the form of a so-called “dot plot,” a chart updated quarterly that shows each Fed official's predictions about the direction of the federal funds rate. There is.
The December dotplot revealed Fed officials' agreement to cut interest rates three times by 2024, the first sign that the Fed is ready to begin easing monetary policy.
That forecast is now in doubt after a series of hotter-than-expected inflation readings and cautious comments from Fed officials.
“So there's still some uncertainty about when they're going to cut rates first and what they're going to do on the dot plot,” said Will Stith, fixed income portfolio manager at Wilmington Trust. “Are you going to keep the 3 cuts or are you going to change them?”
Fed Chairman Jay Powell and others have emphasized in recent months that they want to see inflation fall “sustainably” to its 2% target before starting to cut rates. The Federal Reserve is widely expected to keep interest rates unchanged at this week's Federal Open Market Committee meeting, at a 23-year high.
Investors are adjusting their bets on when these rate cuts will begin. At the beginning of the year, we had expected six cuts starting in March, but we are now expecting three cuts starting in June. Even the probability of a June rate cut has declined in recent weeks. After June, the Fed will only meet four more times in 2024.
“If I had to choose one, [Fed’s] “The message hasn't really changed,” Kevin Gordon of Charles Schwab told Yahoo Finance Live last week. “It's really the market that's jumping around in terms of when they expect rate cuts to start and how much they're going to cut this year.” ”
Esther George and Jim Bullard, two former Fed officials who have previously participated in these deliberations, told Yahoo Finance that they don't expect the forecast to change significantly this week.
“We're probably going to see even more people say they're going to cut rates less than they have in the past,” said George, a former president of the Kansas City Fed. But it's unclear whether that will be enough to change the median of three annual rate cuts, he added.
“Typically we don't change our forecasts that much unless we think we've seen really dramatically different data,” said Bullard, a former St. Louis Fed president.
Indeed, Bullard said there is enough data to support a rate cut at this point, and he doesn't think the recent rise in CPI inflation is enough to change the outlook for 2024.
He instead pointed to the Fed's preferred inflation measure, the Core Personal Consumption Expenditure Index, which was 2.8% in January and could fall to 2% by the third quarter.
He said the Fed could make its first rate cut if the measure reaches the 2.5-2.7% range.
“I always felt like there was an unspoken zone on the committee. [for core PCE] Bullard, now dean of Purdue University's Mitchell Daniels School of Business, acknowledged that “it's hard to transition when the inflation statistics are zigging and zagging in the wrong direction.”
Some market participants say recent survey results point to the possibility of a zero rate cut in 2024, while others urge the Fed to wait until June or later before taking any action. .
Stith, fixed income portfolio manager at Wilmington Trust, said he expects Fed officials to maintain the consensus of three rate cuts in 2024, but doesn't expect them to begin until late summer. I haven't.
“And if we reduce interest rates to 4.75% given the fiscal situation, will we really achieve a sustainable inflation level of 2%?” he says. “I think that's at the forefront of the market's mind given all the strength we're seeing.”
In his semiannual testimony before the Senate two weeks ago, Powell said the Fed was “not that far off” from the confidence needed to cut rates, but some of his colleagues said last month that a rate cut could happen “later this year.” It was suggested that there was a possibility of Or during the summer.
For the Fed to cut interest rates, officials need to see certain components of inflation, such as housing and services, decline in order to have confidence that inflation is returning to 2%, George said. It is said that there is.
He said: “The Committee is very clear that inflation, given the circumstances under which it occurred, believes that it is temporary and that it has now regained credibility.'' “We have a strong determination to return to 2%.”
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