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Fed Preview- Two or Three Cuts and the QT Plan

AInvestTuesday, Mar 19, 2024 10:29 am ET
4min read

$SPY(SPY)$BND(BND)  

The upcoming Federal Reserve meeting has garnered significant attention from investors, as recent high inflation figures have complicated the expectations for an imminent rate cut.

The Federal Reserve's two-day meeting, commencing tomorrow, has attracted significant attention as it follows a string of unexpectedly high inflation figures. Although market participants continue to harbor hopes for an interest rate cut in June, these optimistic sentiments have waned due to the persistence of inflationary pressures.

Amidst persistent inflationary pressures, the Federal Reserve is expected to keep the Federal funds rate steady at 5.25%-5.50%, with Chair Jerome Powell emphasizing the need for a continuation of positive inflation data before considering any easing of policy restrictions. The unexpected increase in inflation figures for January and February support the Federal Reserve's decision to exercise patience and monitor the inflation trend.

The recent inflation trends have raised questions about the central bank's outlook and the potential impact on the market. The 10-year Yield has rallied by 31 basis points since March 8, hitting 4.34% in anticipation of a hawkish message from the Fed. This upward trend has continued for seven consecutive sessions, marking its highest level since November last year.

Market participants eagerly await updates on the Summary of Economic Projections (SEP) and the Quantitative Tightening (QT) program, seeking clues on how the Fed intends to navigate the current inflationary environment. While the FOMC is expected to maintain the Federal funds rate in the range of 5.25%-5.50%, Federal Reserve Chair Jerome Powell is likely to emphasize the need for patience and further positive inflation data before considering any policy easing.

The focus of the meeting will not be on the rate decision, which is expected to remain unchanged, but rather on the Fed's revised economic projections and Chair Powell's insights during the post-meeting press conference.

There is speculation that the pace of Quantitative Tightening (QT) might be slowed in May, with the tapering process potentially concluding in the second half of 2024. However, some market analysts predict a more extended tapering timeline due to a perceived lack of urgency from the Fed.

The Federal Reserve's post-meeting statement is likely to depict a tempered view on economic growth, reflecting a slowdown from the previous quarter's robust expansion. Despite an uptick in the unemployment rate to 3.9% in In February, the labor market remains resilient, with strong job gains and low unemployment levels.

Inflation, which has been a major concern for the Fed, is expected to be described as elevated in the statement, especially after the recent unexpected increase. However , the central bank is also anticipated to acknowledge the progress made in reducing consumer price increases over the past year.

Policy-wise, the target range for the Federal funds rate is projected to remain at 5.25%-5.50%, with the Fed unlikely to consider a rate cut until it has greater confidence in the sustainability of inflation toward the 2% target.

In light of the unexpected strength in economic output and the expansion in the final quarter of 2022, analysts expect the Fed to revise its GDP growth forecast upward for 2024, from the current median projection of 1.4% to approximately 1.7%. This positive momentum is expected to carry over into the following year, although projections for GDP growth in 2025-2026 are likely to remain largely unchanged.

Unemployment rate predictions for the period of 2024-2026 are also expected to experience minimal adjustments, with a slight revision for 2024 down to 4.0%, reflecting the improved GDP outlook.

Regarding inflation, the forecast for Personal Consumption Expenditures (PCE) inflation in 2024 is set to increase, with the core PCE estimate expected to rise to 2.6% from the previously projected 2.4%, and the overall PCE projection also anticipated to adjust upwards to 2.6%.

The Dot Plots will be a keen focus for members. They currently project three rate cuts in 2024. However, the possibility of revising the median 2024 dot plot to indicate two rate cuts instead of three exists if two members of the FOMC adjust their projections.

Typically, the Summary of Economic Projections (SEP) FOMC meetings have a slight positive impact on the US dollar. This time, the potential for a strengthening of the dollar is increased due to the persistence of high inflation figures and the possibility of the dot plot indicating a lean towards fewer rate cuts. However, any significant surge in the dollar's strength is expected to be tempered by dovish signals from the Fed and current valuations and market positions.

In the context of CME Fed Funds Futures, there is a 99% chance that the Fed will leave rates unchanged on Wednesday. This is a significant increase from the 56% chance before the January 31 meeting. Participants also price a 94% chance of the Fed keeping rates steady through the May 1 meeting, compared to 69% one month ago. The CME Fed Funds Futures assign a 55% probability that the Fed will cut rates at the June meeting, down from 72% one week ago.

Trading around the last Fed Day (January 31) saw Nasdaq futures open at 17,415 and close lower at 17,265, as Chairman Powell's unexpectedly hawkish comments caught the market off guard. The Fed released an optimistic assessment of the economy viewed but risks as more balanced. Participants reduced expectations for a March rate cut from 56% to 47% in the wake of the statement.

Despite eliminating references to further rate hikes, the Fed emphasized the need for clearer signs of easing inflation before considering rate reductions. Powell expressed a desire to observe more substantial data on inflation, indicating that the Fed might delay action if Inflation proved persistent.

Nasdaq futures (NQs) maintained their position above the 20-day moving average and have been on an upward trajectory, currently trading at 18,250. This represents a 5.7% increase from the January 31 close. The peak since the last Fed announcement, which is also the all-time high, reached 18,691 on March 8, while the lowest point within this timeframe was 17,221, recorded during Powell's press conference on Fed Day, January 31.

In conclusion, the Federal Reserve's upcoming meeting holds significant importance as it follows a series of unexpectedly high inflation figures. While the Fed is expected to maintain its current policy stance, market participants will closely monitor the central bank's updated economic projections and insights from Chair Powell's press conference for indications on how the Fed plans to navigate the current inflationary environment. Despite the uncertainties, Nasdaq futures have demonstrated a generally upward trend, reflecting the resilience of the market. As the meeting unfolds, market participants will be eager to assess the potential impact on the growth prospects and investment value of various stocks.


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