A Report by CYS Global Remit Counterparty Sales & Alliance Unit
Americans are grappling with the financial repercussions of elevated costs across all types of loans, following two years of interest rate increases by the Federal Reserve (Fed). As the central bank convenes later this week, both economists and consumers are only interested in one question: When will the Fed commence rate reductions?
The consensus on the streets is clear, a rate cut is highly unlikely this month, and chances remain slim for the next meeting as well.
Most economists surveyed by FactSet anticipate that the Federal Reserve will maintain its benchmark rate at the upcoming meeting as well as the subsequent meeting. For consumers yearning for lower borrowing costs, patience is required, as the Fed’s midyear meeting emerges as the most likely juncture for the first rate cut in four years, according to the FactSet survey. [1]
The Fed initiated its series of rate hikes in March 2022, in response to soaring inflation rates during the pandemic, which hit a 40-year peak in June of the same year. Despite a significant reduction in inflation since then, it remains above the Fed’s preferred level, prompting the expectation of steady rates in the upcoming meeting.
However, the upcoming meeting might still reveal noteworthy insights. According to experts, the Fed’s updated economic forecast could offer clues regarding the potential timing for the easing of interest rates.
“The Fed is going to be taking a lot of the oxygen out of the room this week as they conclude their March meeting. We have seen some mixed economic data to start the year. It’s going to be interesting to see how the Fed reacts to that, especially in Fed Chair Jerome Powell’s post-meeting press conference”. Sam Millete, Director of Fixed Income at Commonwealth Financial Network1
Federal Reserve Expected to Maintain Interest Rates
The Federal Reserve is set to make its monetary policy announcement for March this week. The prevailing consensus strongly indicates that the institution, under the leadership of Jerome Powell, will maintain the benchmark rate at its current range of 5.25% to 5.50%, marking the fifth consecutive meeting without a change in direction. Additionally, analysts expect the central bank to continue its quantitative tightening programme, gradually reducing its bond holdings without alterations for the time being.
Though the decision on interest rates might not bring about any significant surprises, the market’s focus will be on the guidance provided. In this context, the Federal Open Market Committee (FOMC) might reiterate its stance that a reduction in borrowing costs would be premature until there is a greater assurance that inflation levels are steadily moving towards the 2 percent target. This would suggest that the FOMC is looking for more substantial evidence of disinflation before considering any rate cuts.
Fed on hold, Maintains Policy Outlook
Following the conclusion of the Federal Reserve March policy meeting, the Fed opted to maintain its benchmark interest rate unchanged within the current range of 5.25% to 5.50%, aligning with market expectations and maintaining borrowing costs at their existing levels for the 5th consecutive meeting. Additionally, there were no alterations to the ongoing quantitative tightening programme as policymakers refrained from stirring the pot, as widely anticipated.
In its accompanying statement, the Fed upheld an optimistic assessment of the company, highlighting that various macroeconomic indicators indicate robust expansion and a low unemployment rate. Regarding consumer prices, the central bank reiterated that while inflation has gradually moderated over the past year, it remains at an elevated level.
The FOMC has also reiterated its stance that it does not foresee removing policy constraints until it has achieved greater confidence in the sustained convergence of inflation towards the 2.0% target. This message echoes the communication from January, suggesting that officials are seeking additional evidence of disinflation before considering a more accommodative stance.
Federal Reserve Maintains Dovish Stance
The US economy continues to demonstrate resilience, characterized by ongoing strength and minimal evidence of inflation receding, alongside mixed signals from the labour market. During the press conference, Fed Chair Jerome Powell emphasized that recent elevated inflation readings do not alter the trajectory of inflation progress and reiterated the Fed’s commitment to avoiding overreaction to just 2 months of data.
Following the Fed’s decision, the US dollar experienced a decline, with investors largely interpreting the central bank’s unchanged policy outlook as in line with previous expectations, thereby overlooking firming price pressures in the economy. Although some hawkish elements were present in the Fed’s guidance, such as the upward revision to the long-run equilibrium rate, traders opted to focus on the near-term outlook, anticipating the approaching easing cycle.
Ultimately, the key takeaway from the FOMC meeting was that there were no significant changes for the central bank; plans to lower rates later this year remain intact, and the process of reducing the pace of quantitative tightening is rapidly approaching, with Powell suggesting that tapering of rates could commence ‘very soon’.
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