The US Federal Reserve will be announcing the monetary policy decision today. The FOMC meeting is underway on January 30- 31 and the Fed’s final decision on rate hike will be announced by Fed Chair Powell on Thursday, January 31, at 2 pm ET. The FOMC Minutes of the January 30- 31 meeting will be released on February 21.
“With inflation showing signs of slowing down and the economy remaining relatively strong, we believe the Fed will keep the fed funds rate unchanged. Since the Fed pivot signal in early December, rates have firmed up on account of strong incoming data and hawkish comments from Fed Governors which have led to a realignment of expectations on rate cuts. It would be important to see whether the Fed maintains its dovish stance or surprises the market with a hawkish tone,” says Vaibhav Shah, Fund Manager, Torus ORO PMS.
The million-dollar question that remains unanswered is – when will the Fed deliver the first cut? The US Federal Reserve is likely to leave interest rates unchanged on Thursday and go for a rate cut starting in March. Powell’s news conference, which will be closely watched by global investors, will thus remain the most crucial event today. “investors will be paying close attention to any commentary from Fed Chair Jerome Powell that could hint at when the Fed believes it is in the clear to begin cutting interest rates is the view of Reliance Securities.
According to ING THINK – “Recent Fed commentary suggests they are in no hurry to loosen policy. As such we continue to favour May as the start point for interest rate cuts rather than March as the market currently favours.”
Presently, inflation appears to be moderately controlled, and the economy has not slowed down despite a 500 basis point rate hike in the past 24 months. The market is focused on how many rate cuts will take place in 2024 and by when the Fed starts the rate cut process. Any considerable increase in inflation is the Fed’s greatest challenge in an otherwise healthy US economy.
Quincy Krosby, Chief Global Strategist for LPL Financial says, “For the Federal Reserve, slower consumer demand would help propel inflation to decelerate at a faster pace, however, with consumer confidence gaining momentum, the economic landscape remains on solid ground.”
US GDP expanded at a 3.3% annualized rate in the fourth quarter on the back of strong consumption. Larry Tentarelli, Chief Technical Strategist, Blue Chip Daily Trend Report says, “The US consumer continues to hold up well, which is a positive for the economy. The stronger data does decrease Fed rate cut expectations. Fed Funds futures have moved to a 39% chance of no rate cut at the March 20 FOMC meeting. We continue to believe that a strong consumer is a net positive for markets.”
While the market expects the US Fed to initiate rate cuts as early as March, not many industry voices are on the same page. Financial historian and senior investment advisor Mark J. Higgins says, “ The FOMC knows that they must avoid the mistakes that they made in the late 1960s, which allowed elevated levels of inflation to become entrenched in the economy. In other words, they know that they cannot abandon tight monetary policy prematurely. I believe that the FOMC will hold rates longer (and possibly even raise them) before this tightening cycle is completed. Further, history also suggests that a brief period of deflation and a recession is likely to occur before price stability returns—even if this is not yet evident in the data.”