Fed maintains rates level while the market looks ahead to easing cycle
On Wednesday, January 31, 2024, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25% – 5.50%. The FOMC made a few notable changes to its first statement of the year. Importantly, while acknowledging that the Central Bank’s employment and inflation goals are “moving into better balance”, the statement was circumspect on rate cuts, though Chair Powell acknowledged that “it will likely be appropriate to begin dialing back policy restraint at some point this year." Specifically, the statement mentions that “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards two percent.” The Fed also removed prior language which had left the door open to future tightening, a concept reinforced during Powell’s press conference.
Impact on rates
The Fed entered this week’s FOMC meeting against a backdrop of the market pricing in about six 25-basis-point cuts during the year (see grid below), while the Fed had forecasted merely three cuts in its latest Summary of Economic Projections. After today’s statement and press conference, rates markets whipsawed as traders assessed bets on a Fed March move. When pressed, Powell did note that a March cut is “not the most likely case” from the FOMC’s perspective. On balance, traders viewed the FOMC outcome as neutral-to-dovish, which reinforces current market pricing.
With the market currently split on whether the Fed will begin cutting in March, the FOMC will be looking for a continuation of the “positive data” they have cited on inflation and the labor market. With goods prices turning deflationary, the Committee will be looking for services inflation to cool enough to support the Fed softening its policy stance. Core PCE — the Fed’s preferred inflation measure — continues to trend downward, the latest reading showing 2.93%. The latest six-month PCE reading showed an annualized rate of 1.90%, suggesting meaningful progress toward the Fed’s goal. Amid consensus on the Fed easing during 2024, the debate will continue around not if, but when.
Subscribe to receive analysis and insights regarding the Federal Reserve policy updates
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.24-0017