Investors are pushing back the timeline for when they expect the Federal Reserve to begin cutting interest rates after Fed Chairman Jerome Powell addressed speculation of a coming pivot.
The Federal Reserve held its first meeting of 2024 this week and opted once again to hold its interest rate target steady at 5.25% to 5.50%. Ahead of the meeting, most investors were predicting that the Fed would start cutting rates at its next meeting in March, but now, it appears more likely that will happen in May.
The central bank’s inflation goal is 2%, and annual price growth is still clocking in above 3%. In the Fed’s policy statement released on Wednesday, Fed officials indicated that they don’t expect to reduce the target rate until they have gained further confidence that inflation is moving toward that goal.
Powell also threw cold water on the notion of a March interest rate cut during a press conference after this week’s meeting. He said a March rate cut isn’t the base scenario for the Federal Reserve.
“I will tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do [rate cuts],” Powell said Wednesday.
Investors are pegging about 38% odds of a cut in March, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. That is a very notable drop from just a month ago, when the odds were put at above 73%.
There is broad consensus, though, that interest rates will be lower after the May meeting. Investors see a mere 6% probability that the Federal Reserve holds interest rates steady through that meeting.
Bill Adams, chief economist for Comerica Bank, said that a March rate cut is still possible, although interest rates are likely to be trimmed in the second quarter of this year, not the first.
“The Fed was badly burned in late 2021 and 2022 when they thought high inflation would be transitory, then got caught by surprise when it was higher and more persistent than expected. They want to avoid making the same mistake twice,” he said. “The Fed will wait to pull the trigger on rate cuts until they see the whites of 2% inflation’s eyes.”
Still, Powell’s press conference did mark a sort of shift for the Fed.
Before this week, Fed officials were careful to leave the door open to more rate hikes in response to stubborn inflation. But instead of talking about more rate hikes, on Wednesday, Powell suggested that the Federal Reserve would simply hold its rate target steady for longer if inflation proves resistant.
There is a growing sense that the Fed might be able to bring down inflation without pushing the economy into a recession, a scenario described as a “soft landing.”
Gross domestic product growth chugged right along last year despite the predictions of many top economic forecasters.
GDP grew at a 3.3% annual rate in the fourth quarter of 2023, adjusted for inflation, bringing growth for the year to 2.5% in 2023.
Still, there is an expectation that GDP will slow this year under the burden of months of higher interest rates. The Fed is also projecting a very modest 1.4% GDP growth in 2024.