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Market Update

Fed maintains rates level while the market looks ahead to easing cycle

January 31, 2024


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.

Source: CME Group, Fed funds target rate expectations as of 4:00 PM EST on January 31, 2024

Moving forward

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.

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