Federal Reserve Holds Interest Rates Steady, Focus Shifts to Future Rate Cuts
Investors eagerly awaiting interest-rate cuts from the Federal Reserve have been repeatedly asking policymakers, “Are we there yet?” The response has consistently been, “Soon, but not quite yet.” As the Federal Open Market Committee (FOMC) prepares to gather in Washington on January 30 and 31, it is widely expected that interest rates will remain unchanged for the fourth consecutive meeting. However, the real focus will be on the future, particularly the FOMC’s March meeting and beyond.
While policymakers have hinted at their readiness to discuss the parameters for lowering rates, they have not indicated any plans to initiate a rate cut in March. San Francisco Fed President Mary Daly emphasized that it is premature to assume interest-rate cuts are imminent and that she needs more evidence of inflation returning to a consistent trajectory before easing policy. Morgan Stanley chief US economist Ellen Zentner expects the first rate cut to come in June, stating that the Fed can afford to be patient.
Unlike previous instances where rate cuts were used to counteract economic contractions, this time the Fed will be adjusting policy to reflect a significant drop in inflation from its high point over a year ago. Fed Governor Christopher Waller believes there is no rush to cut rates rapidly, given the current state of economic activity and labor markets. His comments, along with news of stronger-than-expected retail sales in December, have tempered expectations for a March rate reduction.
History also serves as a cautionary tale for the Fed. In the 1970s, the central bank eased policy too quickly before fully addressing inflation, leading to economic downturns. Atlanta Fed President Raphael Bostic emphasized the need for consistency and avoiding a pattern of raising and lowering rates. Economist Claudia Sahm predicts that the Fed will likely delay a rate reduction until May but could then move quickly if inflation remains low.
Policymakers will receive fresh data on inflation and gross domestic product in the coming weeks, which will inform their decisions. Bloomberg Economics chief US economist Anna Wong expects inflation to remain below 2% on various timeframes. In their last projections, policymakers anticipated lowering rates by 75 basis points in 2024.
The FOMC will also have to decide whether to alter the guidance it provides on future policy actions in its post-meeting statement. While some officials believe the risks of inflation reacceleration have diminished, others may be hesitant to abandon the possibility of another rate hike, given the positive response from bond and stock markets to the prospect of lower rates.
The upcoming November presidential election looms in the background of the Fed’s deliberations. While Morgan Stanley economists argue against assuming that the election will influence monetary policy, it is likely that the central bank will face criticism on the campaign trail. If leading contender Donald Trump fears that Fed rate cuts will benefit President Joe Biden, he may blame the Fed for influencing the election.
In conclusion, while interest rates are expected to remain steady for now, the focus is shifting towards future rate cuts. Policymakers are cautious about initiating rate reductions too soon and are closely monitoring inflation and economic data. The timing of rate cuts remains uncertain, but once they begin, they could potentially be significant. The Fed is aware of the need for consistency and avoiding a back-and-forth pattern of rate adjustments. As the presidential election approaches, the Fed may face criticism regardless of its decisions.
