As the third FOMC meeting of 2024 unfolds, investors and economists alike are poised for insights into the Federal Reserve’s stance on monetary policy and its implications for the economy. Here’s a comprehensive preview of what to expect:
The Fed is expected to maintain its target rate for fed funds at 5.50%, continuing the policy rate pause initiated last September. This decision reflects the Fed’s belief that the rate hike cycle has reached its peak, with prior increases effectively addressing inflation concerns. However, despite this pause, inflation remains stubbornly high. Recent data shows inflation hovering around 3.5%, fuelled in part by escalating energy prices driven by geopolitical tensions. The Fed’s challenge lies in balancing the need to combat inflation with the risk of stunting economic growth.
Inflationary pressures persist despite the Fed’s efforts, exacerbated by supply chain disruptions and rising wages. The recent spike in oil prices, triggered by geopolitical unrest, further complicates the inflationary landscape. The Fed’s preferred inflation target of 2% appears increasingly elusive, with the CPI consistently overshooting expectations. This prolonged period of elevated inflation raises concerns about the emergence of stagflation.
The FOMC meeting will also address the prospect of quantitative tightening (QT) – a policy aimed at reducing the Fed’s balance sheet by allowing Treasury securities to mature without reinvestment. While QT may help curb inflation in the long run, its potential impact on economic growth remains uncertain. Amid conflicting data and the spectre of stagflation, the Fed faces a delicate balancing act. While some indicators point towards the need for continued tightening, others signal potential risks to economic stability.
While rate cuts seem unlikely in the near term, the Fed’s stance will depend on the trajectory of inflation and economic data in the coming months.
Sven Franssen