This week, American investors are bracing themselves for a reality check as Federal Reserve officials gear up to unveil their updated forecasts for interest rates.
The burning question on investors’ minds is whether policymakers will stand by their projection of cutting rates three times in 2024, despite persistent inflation exceeding the targeted 2% mark. The previous week on Wall Street was marked by turbulence, driven by recent data revealing sustained inflationary pressures throughout February.
Investors, who had initially anticipated an interest-rate cut by June, are now wary that the Fed might postpone such actions given the mounting evidence. The prevailing expectation is for the central bank to maintain its policy rate within the 5.25% to 5.5% range after its two-day meeting concludes on Wednesday.
Attention will then turn to the release of the Fed’s latest Summary of Economic Projections, with a keen focus on the eagerly awaited “dot-plot.” This visual representation outlines individual policymakers’ forecasts for the future trajectory of the fed-funds rate.
Thierry Wizman, a global FX and rates strategist at Macquarie, suggests that although the Fed leans towards implementing easing measures around midyear, the upcoming Federal Open Market Committee (FOMC) meeting may extend the observation period by one or two more cycles.
Wizman speculates that Fed Chair Jerome Powell might stress the need for “a little bit more” evidence confirming the sustainability of disinflation before considering rate cuts.
Moreover, Wizman points out that the recent deceleration in the pace of disinflation could prompt Fed officials to revise upward the median “dot” for 2024 and 2025. According to Wizman’s analysis, policymakers initially envisaged a cumulative 75 basis points of cuts in 2024 and an additional 100 basis points in 2025 during the Fed’s December policy meeting.
However, market sentiment has shifted, with Fed-funds futures traders now converging on the expectation of three quarter-point cuts in 2024, down from initial forecasts of six or seven at the beginning of the year, as indicated by the CME FedWatch Tool.
Despite mounting concerns about inflation, the stock market has displayed remarkable resilience. Following the February Consumer Price Index (CPI) report, the S&P 500 achieved its 17th all-time high, propelling the large-cap index to a 7.3% year-to-date gain.
Similarly, the Nasdaq Composite has surged by 6.4% in 2024, while the Dow Jones Industrial Average has recorded a 2.7% increase over the same period, according to data.
As investors brace for the Fed’s updated interest rate projections, uncertainty looms over whether the central bank will adhere to its previous guidance of multiple rate cuts amidst sustained inflationary pressures. Nonetheless, despite inflation concerns, the stock market has maintained its upward trajectory, reflecting a certain level of confidence among investors.