Investing.com – Markets are on alert this week for statements on whether or not they still think three cuts are likely in 2024.
This new forecast will come on Wednesday in the form of a so-called “dot chart,” a graph updated quarterly that shows each Fed official’s expectations about the direction of the interest rate over the coming period.
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In December, a dot chart revealed consensus among Fed officials for three cuts for 2024, the first sign that the central bank was ready to start easing monetary policy.
However, this forecast is now in doubt after a series of inflation data that beat expectations, along with dovish comments from Federal Reserve officials.
“That leaves a degree of uncertainty about when the first cut will come and what they’re going to do on the points chart,” said Will Stith, bond portfolio manager at Wilmington Trust. “Are they going to leave it at three or are they going to change that?”
Fed Chairman Jay Powell and his colleagues have stressed for months that they want to make sure inflation moves “sustainably” to their 2% target before starting cuts. They are widely expected to keep the Federal Reserve’s benchmark interest rate steady at the Federal Open Market Committee meeting that begins today and ends tomorrow, Wednesday, leaving it at its highest level in 23 years.
Investors are adjusting their bets on when these cuts could begin. After starting the year forecasting six cuts starting in March, they now expect three cuts starting in June. Even the prospects for a June cut have declined in recent weeks. After June, the Fed will have only four more meetings in 2024.
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Two former Fed officials — Esther George and James Bullard — said they did not expect the outlook to change significantly this week.
“Unless you think you’ve seen dramatically different data, you usually don’t change your forecasts much,” said Bullard, a former president of the Federal Reserve Bank of St. Louis.
In fact, Bullard said there is enough data to support cuts at the moment, and he doesn’t think the recent higher-than-expected inflation readings are enough to change the outlook for 2024.
He instead pointed to the Fed’s preferred measure of inflation, the core personal consumption expenditures index, which stood at 2.8% as of January and could fall to 2% by the third quarter.
He said the Fed could make its first cut once that reading hits the 2.5%-2.7% range.
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A few market watchers say the latest readings suggest that holding rates until the end of 2024 is now a possibility, while some are urging the Fed to wait until after June before taking any steps.
Wilmington Trust’s Stith expects Fed officials to maintain their consensus on three cuts in 2024, but he doesn’t expect those cuts to begin until late summer.
Powell said two weeks ago in his semiannual testimony before the Senate that the Fed is “not far away” from the confidence it needs to cut interest rates, while some of his colleagues indicated over the past month that that could happen “later this year” or during the next quarter. summer.
For the Fed to cut interest rates, officials would need to see some components of inflation — such as housing and services — decline to get confirmation that inflation is back to 2%, according to Esther George.
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