Rate Cut Odds Fade After Powell Interview

Fed Chairman Jerome Powell | Image by Federal Reserve/Flickr

Wall Street no longer expects the U.S. Central Bank to cut interest rates in March following Fed Chair Jerome Powell’s “hawkish” comments on Sunday.

The odds that the Federal Reserve would cut rates by 25 basis points in March fell to 21% from 42% the previous week, according to the latest data from the Fed Rate Monitor Tool (FRMT), which tracks Fed Futures. On the other hand, the current probability that participants maintain the benchmark rate of 5.25% to 5.50% stands at 79% for the March meeting.

Despite Federal Open Market Committee (FOMC) participants penciling in three rate cuts by the end of 2024, Wall Street is currently forecasting six possible rate cuts and a Fed Funds Rate at 3.50 – 3.75 by year-end.

While participants have acknowledged the recent downtrend in inflation and the possibility for rate cuts in 2024, the committee agreed that there was not enough evidence to be sure inflation is moving sustainably toward the Fed’s 2% goal.

“This certainly suggests that the FOMC does not plan to cut the federal funds rate at its next meeting, on March 19 and 20,” wrote PNC Chief Economist Gus Faucher, per The Dallas Express.

If the FOMC holds rates steady in March, the next opportunity for the Fed to lower rates will occur on May 1. However, rate hike odds for the May meeting are not much better than the odds in March.

The odds that participants hold rates steady in May also rose week-over-week, jumping from 13% to a current probability of 32%, per the FRMT. As of February 6, there was a 35% probability that interest rates remain unchanged, a 55% likelihood of a 25-basis point decrease, and a 12% chance of a 50-basis point decrease.

Even though the broader economic situation has improved over the last six months, Powell said Sunday on 60 Minutes that the main challenge was “picking the time to begin to dial back the restrictive policy.”

Powell did not provide a timeline on when the initial rate cut will occur, but he did say the “time is coming.”

While market participants want more confirmation that inflation is moving down to 2%, Powell said he does not think the committee will reach an appropriate level of confidence in time for the March meeting.

“I would say that’s not the most likely, or base case. However, all but a couple of our participants believe it will be appropriate for us to begin to dial back the restrictive stance by cutting rates this year. And so, it is certainly the base case that we will do that. We’re just trying to pick the right time, given the overall context,” Powell explained.

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