Fed Preview: Forecasts from 10 major banks, downplaying chances of imminent action

We expect the Fed to maintain its monetary policy unchanged. We expect the first rate cut in March and a total of four cuts in 2024. The Fed is in a comfortable position with regard to both sides of its dual mandate. Cooling inflation warrants cutting rates towards neutral, but solid growth and labour markets allow the Fed to move gradually. The Fed is also starting to look towards fine-tuning the endgame for QT, which we expect to last at least until the end of the year. Overall, we see risks tilted towards slightly higher yields and lower EUR/USD around the meeting.

The Fed will not change its interest rates, leaving the target corridor for Fed Funds at 5.25%-5.50%. However, the Fed may gradually enter into a discussion about how long and at what pace it wants to continue reducing its balance sheet.

The Fed is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50% while continuing the process of shrinking its balance sheet via quantitative tightening. We think it is only a matter of time before they do indeed cut interest rates, but we think the starting point will be in May. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weigh on activity and Covid-era accrued household savings provide less support. Our forecast is for the Fed funds target range to be cut to 3.75%-4.00% by the end of this year.

The FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50%. Contrary to December, we expect Chair Powell to convey a more balanced approach regarding the Fed's next policy steps, with the Committee likely preferring to be patient as it ensures that the move lower in PCE inflation can be sustained at the 2% objective. The Fed is unlikely to signal a timeline for cuts. Given the recent strength in data, the question we get is whether the US is exceptional again like last summer. We think not as a combination of good data and low inflation is still one where the Fed cuts rates to prevent further real tightening. Historic Fed cutting cycles are accompanied by bull steepening and USD weakness. 

The Fed is widely expected to hold the fed funds target range unchanged for a fourth consecutive meeting on Wednesday. Attention will be focused on any hints on the potential timing of a pivot to cuts. Another round of strong GDP data in Q4 showed that the economy is still weathering higher interest rates better than expected. But slowing price growth is leaving the Fed with flexibility to hold the line on interest rates for now – and to respond with lower rates later this year (we expect before mid-year) once the economy starts to soften more significantly.

We expect the Fed to keep policy on hold. There is no update to the projections at this meeting, leaving markets to focus on Chair Powell’s press conference remarks. We expect the recent tone of commentary to be maintained, with acknowledgement of the continued progress on inflation, but continued vigilance given the recent resilience in activity. There may also be hints at a potentially earlier winddown of QT, as signalled by the December FOMC minutes.

We expect the FOMC to remain on hold, repeat its data dependence and intention to proceed carefully. The focus will be on Powell’s press conference and how much or how little (again) he is going to push back against market expectations of an early rate cut. We continue to pencil in the first rate cut in June. Once started, we expect the Fed to continue with one cut of 25 bps per quarter.

The FOMC is widely expected to leave the target range for fed funds unchanged at 5.25-5.50% while continuing to run down its balance sheet. Though the topline decision is but a formality, markets will be keenly focused on the Fed’s guidance for the near-term monetary policy path. Those anticipating a March rate cut (fed funds futures are discounting a roughly 50% probability of this) will hope to see the statement scrap the line, ‘in determining the extent of any additional policy firming…’ and opt for something that could tee up a March cut. The former may materialize, but we’re unconvinced that policymakers will be willing to usher in easing at the subsequent meeting. Instead, we’d expect the Fed’s stance to become decidedly neutral. We still expect the first cut to come in June. In addition to the rate path, we’ll be looking for discussions on the future of QT which is growing increasingly topical with investors.

The Fed is likely to keep policy rates unchanged at this week's FOMC meeting and will likely remove its ‘hiking bias’ from the post-meeting statement. Chair Powell will likely send a similar message to that communicated by Governor Waller a couple of weeks ago in that the Fed is not in a rush to cut and will proceed carefully. This would further reinforce the lower, but still positive, probability for a March cut priced by the market. Fed officials are also likely to discuss the process for slowing and ending balance sheet reduction at this meeting, but not release a final plan. In the OCIS base case, the Fed will likely commence its rate cut cycle in June with a 25 bps cut and may also slow its balance sheet reduction in June and end it by year-end.

The January meeting of the FOMC is an important opportunity for it to outline its framework for policy decision making this year. The FOMC is data driven and will review policy meeting-by-meeting. The market will be keenly watching if a March rate cut is discussed. We think Chair Powell will flag if a rate cut is imminent. When the Fed does start to ease, we expect cuts will be gradual. Based on the broad suite of data, the soft core Personal Consumption Expenditure (PCE) deflator readings in Q4 may not prove sustainable. We have the northern summer pencilled in for the start of rate cuts. Ultimately, the pace of the incoming data will determine the timing of the pivot, and it is prudent to be on alert for cuts from spring.