The upcoming Federal Open Market Committee (FOMC) meeting Jan. 30-31 faces the challenge of bridging the significant gap between market expectations for interest-rate cuts and the committee’s own projections for policy in 2024. While no rate moves are expected at the end of the two-day meeting, the market will be eager to hear Fed Chair Jerome Powell’s explanation of potential future rate cuts.
Current economic conditions indicate steady growth with low unemployment, inflation above the central bank’s target and favorable financial conditions.
Federal-funds futures continue to price in up to six rate reductions of 25 basis points each by December, although this exceeds the FOMC’s most recent Summary of Economic Projections, which calls for the equivalent of three 25-basis-point reductions by the end of the year.
Fed Gov. Christopher Waller suggested rates could start to come down once the FOMC is confident inflation is sustainably near the 2% target. However, the marked easing in financial conditions, including rising stock prices and improvements in credit markets, points to stronger economic growth ahead.
While politics aren’t supposed to influence Fed policy, the upcoming elections could affect business and consumer expectations, potentially influencing the economy and policy in a counterintuitive way. Fed policy has largely avoided political influence, but there is a historical precedent where economic policy uncertainty ahead of an election influenced business decisions.
Of note: Consumer sentiment is currently at a two-year high, with declining inflation expectations. This doesn’t align with the aggressive rate cuts priced in by the futures market. The wide gap between market expectations and central bank projections leaves room for Powell to provide clarity during the upcoming meeting.
