Federal Reserve officials will wrap up their two-day meeting on Wednesday and are widely expected to keep interest rates steady at their highest level in two decades when they release their policy decision at 2 p.m
But investors will likely be watching the meeting – particularly Chairman Jerome H. Powell’s 2:30 p.m. news conference – closely for clues about when policymakers might begin cutting interest rates. The Fed has kept its key interest rate in a range of 5.25 percent to 5.5 percent since July, and officials predicted in December that they could cut borrowing costs by three-quarters of a percentage point over the course of 2024.
But both the timing and extent of these rate cuts remain uncertain. On the one hand, inflation has fallen faster than many economists had expected in recent months. On the other hand, economic growth is proving to be stronger than expected, which could give companies the opportunity to continue increasing prices in the future.
Here’s what you should know about this meeting.
The Fed’s statement could change.
The Fed’s policy statement after the meeting indicated that officials will monitor economic data “to determine the extent of additional monetary tightening that may be appropriate.” Since further interest rate increases are now becoming increasingly unlikely, this wording could be adjusted.
Powell has a delicate balancing act.
Fed officials don’t want to keep interest rates so high for so long that they put too much pressure on the economy and send it into recession. On the other hand, they don’t want to cut interest rates too early so that the economy gains momentum and inflation rises again. Mr. Powell could talk about how officials will try to strike that balance.
GThe relationship between inflation and inflation will be crucial.
Much of what comes next will depend on which numbers Powell and his colleagues focus on – growth or inflation – and investors could get a hint of that this week. Both growth and consumer spending are faster than many economists expected. But the Fed’s preferred inflation indicator is also below 3 percent for the first time since the start of 2021, even after accounting for food and fuel costs, which can fluctuate from month to month.
Investors remain uncertain.
The conflicting signals have left Wall Street more uncertain about what the Fed will do next. Most investors previously expected a rate cut at the Fed’s next meeting in March. But sentiment is now leaning towards a rate cut in May. Mr Powell’s comments have the potential to change those expectations – either making an imminent rate cut more likely or pushing it further off the table.
“It’s a conversation about: When do they start easing interest rates? Because they don’t want to raise interest rates too much,” said Gennadiy Goldberg, chief U.S. interest rate strategist at TD Securities.
“We are about to have the last non-live meeting,” he said, meaning that while no rate change is expected in January, rate cuts could be on the table at any meeting after that.
The pace of rate cuts is an open question.
Another interesting point to pay attention to on Wednesday: What will this likely look like if the Fed actually starts cutting rates? Rate cuts could be quick and steady, large or small, and occur earlier or later in the year.
Fed Governor Christopher Waller has already suggested that the central bank should be able to cut interest rates “methodically and cautiously” rather than making the large rate cuts that have occurred at times in the past.
Balance sheet details could follow.
The Fed has been shrinking its balance sheet of bond holdings after it grew sharply during the pandemic as the central bank bought securities to calm markets and stimulate the economy.
Officials have reduced their holdings by allowing their securities to expire without reinvesting them. But at some point, policymakers will have to stop, because reducing bond holdings too much could lead to market chaos.
In fact, minutes from the Fed’s December meeting showed that officials believed it appropriate “that the Committee should begin discussing the technical factors that would guide a decision to slow the pace of outflows well in advance of such a decision.” has been taken to ensure that there is adequate advance notice to the public.”
Will this discussion of the nerdy details happen at this meeting? Economists will be on the lookout.
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2024-01-31 10:02:41
www.nytimes.com
