Ahead of FOMC: Investors Still Perplexed About Rate Cut Timing

Following its meeting in March, the Federal Reserve (Fed) is anticipated to make announcements regarding monetary policy and to release the updated Summary of Economic Projections (SEP), also known as the dot plot, on Wednesday. For the sixth consecutive meeting, market participants predict that the US central bank will maintain the policy rate at 5.25%–5.5%.

No Rate Cut Expected in May, But June in Play?

In order to confirm or refute a policy shift in June, investors will closely examine the SEP and remarks made by Fed Chairman Jerome Powell, as the CME FedWatch Tool indicates little to no possibility of a rate cut in May. There is a 43% chance, per the FedWatch Tool, that the Fed will maintain current rates in June.

Inflation Concerns Cloud Impact 2024 Rate Cut Plans

The policy rate was expected to drop by a total of 75 basis points (bps) in 2024, according to the dot plot that was released in December. The article also noted that Fed policymakers projected inflation to average 2.4% in 2024 before it reached the 2% target again in 2026.

Strong Labor Market, Rising Inflation: A Balancing Act for the Fed

Since the policy meeting in December, macroeconomic data releases have indicated that although the labour market remained reasonably strong, consumer and producer inflation began to gradually increase in the first few months of the year. Activity-based indicators indicated that the US is quite likely to escape a recession, such as surveys of the PMI that look forward.

Dot Plot and Powell’s Speech Key to Unveiling Fed’s Next Steps

In light of the recent strengthening in inflation, it is widely anticipated that the FOMC will maintain the Fed funds target range at 5.25%–5.50% next week. Chair Powell will probably continue to urge patience with the Committee’s next course of action. The Fed is also anticipating the delivery of initial QT plan specifics.

Market Volatility Expected During Fed Decision and Press Conference

At 18:00 GMT, the Federal Reserve is expected to reveal its rate decision and release the monetary policy statement along with the SEP. Chairman Powell’s press conference is slated to take place at 18:30 GMT. In the event that the updated dot plot confirms authorities’ continued preference for 75 basis point reduction, this may cause markets to tilt towards a June pivot. However, officials may be in favour of a 50 basis point drop in interest rates this year, pointing to a comparatively robust labour market and higher-than-expected rates of producer and consumer inflation since the year’s commencement.

To summarize, the policy statement, dot plot, and Powell’s remarks will be challenging to follow because of the expected increase in USD volatility during the event.