In the prelude to the Federal Open Market Committee (FOMC) meeting on Wednesday, we confidently forecasted that the Fed would leave its target rate for fed funds unchanged. True to our prediction, the FOMC held the line, keeping the federal funds target at 5.50%.
What unfolded post-announcement was nothing short of a market earthquake. Contrary to expectations of a pivot towards lower rates, the Fed, in fact, hinted at a more hawkish stance. As a consequence, the Dow Jones Industrial Average fell 0.82%, the S&P 500 1.61%, and the NASDAQ Composite 2.23%.
The key takeaway from the Fed’s statement was their lack of confidence in current inflation containment. Despite acknowledging that risks to employment and inflation are moving into better balance, the Committee stressed the need for sustained evidence that inflation is on a steady course towards their 2% target.
Fed Chair Jerome Powell, in a departure from the usual, provided a detailed forecast for the next meeting on March 19-20, 2024. Powell expressed scepticism about the committee reaching a level of confidence to reduce rates at the upcoming March meeting. This dashes Wall Street’s hopes for a rate cut until at least May 1, 2024, and potentially even longer if oil prices continue to impact consumer prices.
A rate cut won’t be driven by a Goldilocks narrative. Instead, it will stem from a belief that economic conditions may force the economy into recession, with possibly deflation dominating the landscape. Powell’s focus on data and his insistence on needing more evidence of inflation control suggest that any rate cut will be a response to challenging economic conditions rather than political considerations.
The next FOMC meeting in March promises to be pivotal, with evolving economic indicators shaping the Fed’s decision-making process.
Sven Franssen