Today, the FOMC is expected to keep the federal funds target range at 5.25%-5.50%. However, the main focus for the markets will be clues from the FOMC on when it will begin cutting interest rates and the tapering of Quantitative Tightening (QT). The markets have fully priced in a 25 bp rate cut by the FOMC at the April 30-May 1 meeting. However, upcoming reports on the labor market and consumer prices could change that timing.
The FOMC today may tweak its policy statement to remove its tightening bias and lay the groundwork for an eventual cut in interest rates. Policymakers may replace the phrase “the extent of any additional policy firming” with a more dovish “the stance of appropriate monetary policy.” However, recent economic reports show that the U.S. labor market remains strong, and the economy continues to hum along. Weekly jobless claims remain historically low, near 200,000, and Q4 GDP grew more than expected.
The swap markets have priced in only a 65% chance for a rate cut by the Fed at the March 19-20 FOMC meeting, as strength in the U.S. economy has pushed back expectations for rate cuts. However, today’s U.S. economic reports were Fed-friendly as they showed some weakening in the labor market and falling wage pressures, which could prod the Fed to cut rates in March. The Jan ADP employment change report showed hiring slowed more than expected, and the Q4 employment cost index posted its smallest quarterly increase in 2-1/2 years.
Even if comments today from Fed Chair Powell maintain a hawkish tilt and signal no imminent Fed easing, Powell’s Humphrey-Hawkins testimony before Congress in late February or early March could signal when the Fed will begin lowering borrowing costs. The Fed will also have two payroll reports to see before the March FOMC meeting and revisions to CPI seasonal factors on February 9 that could boost the chances of a March rate cut.
With survey data from Fed districts pointing to faster deterioration in the economy than the hard data, policymakers may not be as confident about a soft landing as the markets are. That could prompt the Fed to cut rates in March as insurance against a downturn in the economy, conditional on incoming data. However, the Fed may decide it is prudent to wait until the April 30-May 1 FOMC meeting to start cutting interest rates.
With the stock market at record highs, investors may be reluctant to push stocks much higher without more certainty on when the Fed might begin cutting interest rates.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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