Key Takeaways:
The Federal Open Market Committee (FOMC) meeting on Wednesday will reflect changes in Fed officials’ perspectives due to recent negative inflation data.- There’s a possibility that policymakers might revise down their expectations for three interest rate cuts this year.
- The Fed’s benchmark interest rate affects borrowing costs for various loans.
- High interest rates are being employed by the Fed to combat inflation.
- The Fed is awaiting clear evidence of a downward trend in inflation before considering rate cuts.
Are lower interest rates coming this summer? Wednesdayās meeting of the Federal Open Market Committee could go a long way toward answering that question. Inflation has proven more stubborn than officials at the Federal Reserve had once hoped, and this weekās meeting of the Fedās policy committee will reveal how much the latest round of data has altered the central bankās plans to cut its benchmark interest rate this year.
At stake is whether, and to what extent, the Fed will lower the fed funds rate. This rate influences interest rates on mortgages, credit cards, auto loans, and other types of loans, all of which currently have borrowing costs close to multi-decade highs.
While the Fed could theoretically adjust the interest rate at its Wednesday meeting, it is widely expected to maintain the rate at its current level. Fed officials have stated that they are awaiting “greater confidence” that inflation is firmly on its way back down to the central bankās goal of a 2% annual rate before considering a rate cut. In February, inflation was running at 3.2% over the year, down from its recent peak of 9.1% in June 2022 as measured by the Consumer Price Index. The larger question is whether they anticipate cutting rates at the same pace as they did during their last round of projections.
In December, Fed officials, buoyed by cooling inflation, had forecasted a 0.75 percentage point reduction in the rate from its current range of 5.25% to 5.50% in 2024. However, this outlook has been cast into doubt by higher-than-expected consumer price increases in January and February, raising the possibility that inflationās downward trajectory has stalled.
Policymakers on the Fed committee were in a communications blackout when Februaryās discouraging news on the inflation front emerged, so Wednesdayās meeting will offer the first indications of how it has altered their thinking, or whether they will dismiss it as a temporary setback.
What Will the Dot Plot Tell Us?
Some experts believe that the Federal Reserve will maintain its forecast of three 0.25 percentage point rate cuts later this year, anticipating that the slower rent increases observed over the past year will eventually lead to a decline in inflation measures in the coming months. However, there is a considerable chance that officials may revise their expectations downward to only two rate cuts.
Ellen Zentner, chief economist at Morgan Stanley, wrote in a commentary that they anticipate little change to the Federal Open Market Committee (FOMC) statement and projections, with the median dot remaining at three cuts. However, she noted the key risk that if just two participants shift from expecting three cuts to two, the median dot could move to a total of two cuts in 2024, indicating a tilt towards fewer cuts rather than more.
Zentner was referring to the “dot plot,” which the Fed will release after Wednesday’s meeting, illustrating how FOMC members perceive the economic outlook and their projections for the fed funds rate over the next few years. These projections are released quarterly.
Michael Gapen, U.S. economist at Bank of America, wrote in a commentary that while there is room for optimism, there are several inflation reports and ample time between now and June to change course if necessary. However, the risk remains that reduced confidence in inflation could lead to fewer rate cuts in 2024, or even in 2025.
According to the CME Groupās FedWatch tool, which forecasts rate movements based on fed funds futures trading data, markets are currently pricing in three quarter-point rate cuts this year, with a 55% chance they will commence in June. This represents a significant shift from the beginning of the year when markets had expected twice as many rate cuts starting in March.