Powell tamps down March rate cut hopes

Fed Chair Jerome Powell flatly stated a cut as early as March seemed unlikely

By Ahmed Azzam | @3zzamous | 1 February 2024

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  • Policymakers indicate a shift toward a more balanced risk landscape.

  • Officials emphasize that a cut will only be considered once there is increased confidence in the trajectory of inflation.

The Federal Reserve, in its latest decision, opted to keep interest rates unchanged for the fourth consecutive meeting, redirecting attention towards potential clues about future rate cuts.

Powell pours cold water on March optimism

The Federal Open Market Committee (FOMC), responsible for policy decisions, signaled a willingness to consider rate reductions but dampened expectations of an imminent cut in March. Fed Chair Jerome Powell tempered investor enthusiasm, asserting that a reduction in the target range would only be deemed appropriate when there is increased confidence in inflation sustainably moving toward the 2% target.

During a press conference following the meeting, Powell emphasized the unlikelihood of a rate hike, stating, "I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting." Despite acknowledging recent progress in inflation, Powell underscored the necessity for additional data confirming the downward trend.

The FOMC's statement highlighted a shift in language, abandoning the previous suggestion of a possible rate hike and adopting a more balanced outlook on future policy. Powell further stated, "We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."

Balance sheet talks loom in March

The decision to maintain the target range for the benchmark federal funds rate at 5.25% to 5.5% was unanimous among FOMC members. The central bank reiterated its commitment to reducing its balance sheet by up to $95 billion per month, with plans for detailed discussions on the balance sheet at the upcoming March meeting.

The FOMC's statement emphasized the careful assessment of incoming data, the evolving outlook, and risk balances when considering adjustments to the federal funds rate. Notable changes included the omission of language characterizing the banking system as "sound and resilient," signaling a shift in the committee's perspective.

Additionally, the FOMC reaffirmed its long-term goals and monetary policy strategy, maintaining a commitment to a 2% average inflation target. The committee updated policies governing investments and trading by Fed staff and policymakers, tightening restrictions and expanding the number of staff subject to stringent measures.

Eager anticipation for January job market data

Looking back at 2023, the economy exceeded policymakers' expectations, with steeper-than-anticipated inflation decline, a 2.5% GDP growth, and a resilient job market, reflected in a 3.7% unemployment rate in December. As economists eagerly await January's job market data from the Bureau of Labor Statistics, early indications suggest a generally positive report, with modest payroll growth and a marginal uptick in unemployment.