The Fed has little choice but to stay on the sidelines this week as it navigates the complex and contradictory combination of forces playing out in the U.S. economy.
Markets are pricing in a near zero chance that the Federal Open Market Committee, which sets interest rates, will cut rates at this meeting or any other meeting in the near future. Futures pricing suggests that policymakers won’t consider easing until at least September, and likely October, and even then, they will cut rates only once this year.
Ahead of Wednesday’s decision, Chairman Jerome Powell and his colleagues will have to grapple with the Iran war, concerns about surging inflation and mixed signals from the labor market. A combination of factors makes it almost certain that the Fed will keep its key interest rate target between 3.5% and 3.75%. There are no major changes in the updated outlook for the economy or interest rates.
“The decision itself is almost certain, that is, to leave interest rates unchanged at the March meeting, but the key will be whether Chairman Powell gives any indication about the future direction of interest rates,” said Beichen Lin, senior investment strategist at Russell Investments. “Broadly speaking, the US economy remains strong. But this means the bar for further rate cuts in the US could be quite high.”
Even before the war, traders had not expected a rate cut at this week’s meeting. Instead, they expected the FOMC to wait until June and then cut rates at least once before the end of the year, according to CME Group’s FedWatch pricing.
But the attack and its impact on oil and inflation changed market calculus, even though Fed officials typically scrutinize the type of oil shocks that accompany combat.
As a result, Mr. Powell’s message will likely attract attention. If all goes as planned, this will be Powell’s penultimate meeting as chairman, and markets may be wary of reading too much into his remarks.
build the future
“A rate cut in April is almost fully priced in, and Mr. Powell’s ability to guide markets will depend on the extent to which his statements are perceived to represent the committee’s consensus rather than his own views,” Bank of America Fed watchers said in a note. “Even putting this constraint aside, Mr. Powell would be best suited for his job.”
Former Fed Vice Chairman Roger Ferguson told CNBC that he expects the committee to be “cautious” in its post-meeting statement as it characterizes inflation, unemployment, economic growth and the expected direction of policy.
“The question at the front of everyone’s mind is: what does it say about the future, how do they think about changing the balance of risk?” he said.
Mr. Ferguson said he would like to see the Fed focus on prices when weighing the labor market and inflation.
“I’m more worried about rising inflation. As you know, the Fed has a 2% target. The fact is, the Fed has been moving away from that goal for years.” “At some point, you’re going to start to question whether the 2% target is really the Fed’s goal, so I’m more concerned about that.”
View dot plot
Investors can learn more about the committee’s thinking when it releases an update on its economic forecast summary. The release includes a “dot plot” grid of each official’s interest rate forecasts, which the Fed closely monitors.
However, most observers expect little change in the SEP or dot plot. The Fed may push economic growth and inflation slightly higher from its last update in December, but its interest rate outlook is expected to remain largely unchanged. Officials said in December they expected to cut interest rates only once this year, and the consensus is expected to hold despite disagreements over recent Fed decisions.
“If you look at their interactions, they will emphasize that the Middle East conflict has added further uncertainty to the inflation and employment outlook, but their forecasts are likely to be strikingly similar to three months ago,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Above all, there remains a political atmosphere at the Fed.
President Donald Trump has been pushing central banks, especially Chairman Jerome Powell, to cut interest rates for years. Appearing before members of the media on Monday, President Trump again slammed the chairman, saying Powell should have called a special meeting.
“When is there a better time than now to cut interest rates? Even a third grader can tell you that,” Trump said.
But President Trump’s own Justice Department is holding off on replacing Powell.
The nomination of Kevin Warsh to replace Powell in May has been held up by U.S. Attorney Jeanine Pirro’s ongoing lawsuit against Powell over renovations to the Fed’s headquarters. Until this issue is resolved, Sen. Thom Tillis, RN.C., said he will block Warsh’s nomination on the Senate Banking Committee.
