WASHINGTON: The US Federal Reserve is almost certain to hold its key lending rate steady for a fourth consecutive meeting on Wednesday, as inflation inches closer towards its long-term target of two percent.
But analysts and traders will look beyond the headline figure for any indication of how soon the US central bank could start cutting rates.
The second day of meetings to set the Fed’s benchmark rate began Wednesday, with the Federal Open Market Committee (FOMC) to publish its decision at 2:00pm local time (1900 GMT).
Following a post-pandemic surge in inflation, fueled further by the Russian invasion of Ukraine, the Fed rapidly hiked interest rates to bring the price-increase measurement down – with surprising success.
The Fed’s target inflation rate, which strips out volatile food and energy prices, has now fallen below an annual rate of 3.0 percent, while economic growth remained robust at 2.5 percent in 2023 and unemployment stayed close to historic lows.
US Fed rate cuts become question of when, not if
“The data to date has been stunningly good,” KPMG chief economist Diane Swonk wrote in a blog post this week.
Fresh data published Wednesday from ADP showed that private sector hiring has cooled more than expected this month, further underscoring the Fed’s progress.
But Fed policymakers are expected to keep the central bank’s key lending rate unchanged Wednesday at a 23-year high of between 5.25 and 5.50 percentage points.
This week’s meeting should serve “to confirm that the FOMC has left behind its tightening bias and has more intensely begun the discussion around rate cuts,” Deutsche Bank economists wrote in a note to clients.
The hints could either come in the rate decision itself, or in Fed Chair Jerome Powell’s press conference later in the day.
But Powell must “be cautious to curb his enthusiasm at the press conference so that he does not inadvertently trigger a major financial market rally,” as happened after the last rate decision in December, Swonk from KPMG said.
‘Work left to do’
In its December meeting, the Fed raised its economic outlook for the year ahead, and signaled it expects as many as three quarter-percentage-point rate cuts in 2024, sparking optimism in financial markets that the central bank could cut rates as soon as March.
When the Fed lowers interest rates, US consumers get cheaper access to credit, meaning the cost of everything from car loans to mortgages falls, while company valuations see a boost.
In response, FOMC officials came out to pour cold water on such enthusiasm.
“We are fully committed to restoring price stability and doing it of course as gently as we can, but we have a lot of work left to do,” San Francisco Fed Chair Mary Daly told Fox Business earlier this month.
And Atlanta Fed President Raphael Bostic told a conference that recent “unexpected progress” in the fight against inflation had led him to move up his forecast for the start of rate cuts from the fourth quarter of this year to the third.
“But the evidence would need to be convincing,” added Bostic who, like Daly, is a voting member of the FOMC.
March, May and beyond
Heading into this meeting, traders and analysts were divided between those who believe the first rate will come in March, and those who expect the Fed to tread more cautiously, and move in May instead.
“We retain our baseline expectation that the FOMC will initiate an every-other-meeting cutting cycle in March,” economists at Barclays wrote in a recent investor note, adding that their forecast was dependent on the Fed’s favored inflation measure continuing to come in weak.
Goldman Sachs Research also expects a March cut, “mainly because progress on inflation is already sufficient,” chief US economist David Mericle wrote in a recent note.
Futures traders have oscillated over a possible March cut in recent weeks, according to AFP analysis of CME Group data.
They are much more confident about the chances of a May cut, assigning a near-90 percent probability that the Fed will have a lower rate by May 1 than it does now.