US Fed meet in focus: Will the Fed give clear signals on rate cuts?

For nearly a year, the world has eagerly awaited clear indications of rate cuts from the Fed, yet the central bank has consistently emphasized the possibility of prolonged higher rates.

There are no expectations of a cut at this juncture but hopes are alive that the Fed will go for a cut in June this year. Meanwhile, inflation remains above the Fed’s 2 per cent target.

The US Consumer Price Index (CPI) for February registered a 3.2 per cent annual increase. This was slightly over the market expectations of 3.1 per cent.

Also Read: US inflation rises to 3.2%, dampens hope of Fed’s interest-rate cut until June

However, Powell in his comments to US lawmakers earlier this month said the central bank expects to reduce its benchmark interest rate later this year even though the continued progress on lowering inflation to the two per cent target “is not assured”.

Read more: US Fed signals rate cuts in 2024; Powell says progress towards 2% inflation target ‘not assured’

Mint talked to several analysts on what they expect from the Fed policy outcome this time and how it can impact market sentiment. Here’s what they said:

Deepak Jasani, Head of Retail Research at HDFC Securities

The US Fed is widely expected to keep its key lending rate unchanged again on Wednesday, as policymakers continue dialogue over when to start rate cuts.

The US is seeing a small uptick in the pace of monthly inflation and at the same time, the unemployment rate has remained low, wage growth has reduced, and economic growth for the final quarter of 2023 came in above expectations — all indications that the US economy remains in good shape despite higher rates.

After two days of discussions, the US Fed will publish an updated summary of economic projections (SEP) alongside its rate decision on Wednesday, which will include policymakers’ views of where they expect interest rates to be at the end of this year.

The March update published Wednesday is unlikely to show a significant shift, although there remains a chance that the policymakers could reduce the number of cuts to two (from the earlier three) they expect to see this year.

Any outcome different from the above could shake up the global equity markets.

Also Read: US inflation prints dent rate cut hopes; what will move the market now? Here’s what 5 experts say

V K, Vijayakumar Chief Investment Strategist, Geojit Financial Services

The Fed is unlikely to cut rates in this meeting since the latest inflation trend is slightly higher than expected.

The market had a view of five rate cuts in 2024. Given the stubborn inflation and sustained strength in the economy, the Fed is likely to reduce the number of rate cuts this year to two.

This may not impact the market negatively since the economy is doing well and is set for a soft landing. But if the Fed in its Wednesday meeting sounds hawkish, it can hurt the market.

Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India)

Fed is expected to largely reiterate the stance of the previous policy as the data flow since the last meeting has largely been in line with expectations.

Since the last meeting, inflation has ticked up slightly and so has the unemployment rate. The economy remains reasonably well anchored though leading indicators like PMI suggest some slowdown in momentum.

Markets have also revised downward the rate cut expectation to about 75 bps now, largely in alignment with the dot plot, compared to 150 bps earlier.

Given the aggressive rate hikes in the last leg of the tightening cycle and the sharp fall in headline inflation in the last one year, there is still a strong case for the start of rate cuts in the second half of the year.

Although the Fed is unlikely to bind itself into any specific timeframe, it may provide a more explicit signal of a rate cut in the third quarter of the calendar year 2024.

The broad market consensus seems to be for rates to have peaked in the current cycle and the next move from central banks to be a cut though with a pause for the time being.

To some extent, the cuts have already been priced in by the markets. Accordingly, investors may also need to position them in line with those expectations, depending on the respective risk profile.

Anitha Rangan, Economist, Equirus

US fundamental data suggests that the economy remains fairly resilient and inflation data for the last eleven months has remained around 3 per cent.

The previous eleven months witnessed a sharp slide in inflation from eight to four, but the journey from there remains stuck at three.

This means that the job of the Fed with its 2 per cent inflation target remains even more challenging. In Dec’23, the Fed gave its expectations of three rate cuts for this (median dot plot estimates).

However, since then, the Fed has sounded more hawkish and even in Jan’24 policy gave very little evidence of turning accommodative any time soon.

Into the March’24 policy, Fed officials remain more hawkish than the previous policy which drives the expectation that the dot plot estimates can get trimmed to two cuts from three cuts.

Even if there is no clear conclusion on three, the base case is clearly that there will be more lean towards two or even one, and divergence in policy outlook can emerge. The case for accommodation is some time away.

Markets have reversed their Dec’23 optimism of more than six cuts to three cuts after two months by mid-Feb’24. Since then, there has been gradual retracement pushing back the first full cut towards July’24.

However, if the Fed turns more hawkish and expectations are trimmed to two from three in the policy, clearly there will be a sharp reduction in expectations, a rise in bond yields and an equity sell-off.

The last six months have seen a rally from 5 per cent in Oct’23 to 3.8 per cent in Dec’23 and a reversal to 4.3 per cent currently. The Fed policy should brace for the possibility of a further rise in bond yields.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 18 Mar 2024, 02:30 PM IST