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Here’s what to expect when the Fed wraps up its meeting on Wednesday

Federal Reserve Chairman Jerome Powell prepares to testify before the Senate Banking, Housing and Urban Affairs Committee on March 7, 2024.

Kent Nishimura | Getty Images News | Getty Images

Facing stubborn inflation that has sparked concerns about the direction its policy will take, the Federal Reserve found itself trapped in a holding pattern that will likely be reflected when its meeting closes Wednesday.

Markets expect almost no chance that the Federal Open Market Committee, the central bank’s decision-making body, will announce a change in interest rates. That will keep the Fed’s overnight borrowing rate in a range between 5.25% and 5.5% for what could take months or longer.

Recent comments from policymakers and Wall Street indicate there is little else the committee can do at this point.

“Almost everyone at the FOMC is talking about the same scenario right now,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “With perhaps one or two exceptions, policymakers almost everywhere agree that the inflation data of the past few months are too hot to warrant near-term action. But they still hope that they will be able to reduce rates later.”

The only news likely to come out of the meeting itself is the announcement that the Fed will soon reduce the level at which it reduces its bond holdings on its balance sheet before ending a process known as “quantitative tightening.” quite.

Other than that, the focus will be on rates and the central bank’s reluctance to move just yet.

Lack of confidence

Officials from Chairman Jerome Powell to regional Fed bank presidents have said they do not expect to begin cutting rates until they are more confident that inflation is heading toward the right direction and returned towards the annual objective of 2%.

Powell surprised markets two weeks ago with tough words about the determination of he and his colleagues to fulfill this mandate.

“We told the FOMC that we need to have more confidence that inflation is moving sustainably toward 2% before it is appropriate to ease policy,” he said at a conference of central banks. “Recent data has clearly not given us greater confidence and instead indicates that it will likely take longer than expected to achieve that confidence.”

Markets have actually held up pretty well since Powell made those comments on April 16, although stocks sold off Tuesday ahead of the meeting. THE Dow Jones Industrial Average had even gained 1% over this period, as investors seemed willing to live with the prospect of a higher rate climate for longer.

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But there is always the specter that an unknown person could emerge.

This likely won’t happen during the business portion of the FOMC meeting, as most observers believe the committee’s statement will show little or no change from March. Still, Powell has been known to surprise markets in the past, and his comments during the news conference will be scrutinized to determine how hawkish committee members are.

“I doubt we’ll get anything that really surprises market prices,” LeBas said. Powell’s comments “made it clear that we have not yet reached the threshold for significant new evidence of slowing inflation,” he said.

Much data has recently become available to support this position.

The personal consumption expenditures price index released last week showed inflation of 2.7% per year when including all items, or 2.8% for the all-important core measure that excludes food and energy. Fed officials prefer the Commerce Department index as the best indicator of inflation and focus more on core inflation as the best indicator of long-term trends.

Further evidence came Tuesday when the Labor Department said its employment cost index rose 1.2% in the first quarter, a gain of 0.3 percentage points from the previous period and an increase of 1% compared to Wall Street forecasts.

None of these numbers are consistent with the Fed’s target and will likely cause Powell to be cautious about the future of his policy, emphasizing the prospects of lower rates in the near future.

Down to one cut, hope to get more

Futures market prices see only about a 50% chance of a rate cut as soon as September and now expect only a quarter-percentage-point reduction by the end of 2024, according to the measure highly appreciated by FedWatch of the CME group.

Some on Wall Street, however, are still hopeful that inflation data will show progress and allow the central bank to cut rates.

“Even though the recent upward surprise in inflation has reduced the FOMC’s room for cuts this year, we expect future inflation reports to be more subdued and we still anticipate cuts in July and November , although even moderate upside surprises could further delay cuts,” the Goldman Sachs economist said. David Mericle said in a note.

Wall Street bank economists are bracing for the possibility that the Fed will remain on hold for longer, particularly if inflation continues to surprise on the upside. Additionally, they said the prospect of higher tariffs after the presidential election – favored by former President Donald Trump, the Republican nominee – could be inflationary.

Additionally, Goldman is part of a growing chorus on the Street that thinks the Fed’s March forecast for the long-term “neutral” interest rate — neither stimulative nor restrictive — is too low, at 2.6%.

However, the company does not anticipate rate hikes either.

“We continue to think that rate hikes are rather unlikely because there is no sign of real warming at the moment and the funds rate is already quite high,” Mr. Mericle said. “It would likely take either a severe global supply shock or very inflationary policy shocks for rate hikes to become realistic again.”

QT progress

One piece of news the Fed will likely make at the meeting would be a balance sheet announcement.

The central bank allowed the monthly withdrawal of up to $95 billion in maturing Treasury bills and mortgage-backed securities, rather than reinvesting the debt proceeds. The operation reduced the Fed’s total holdings by about $1.5 trillion.

At their March 19-20 meeting, officials discussed reducing runoff “by about half the recent rate,” according to meeting minutes.

As holdings are reduced, bank reserves parked with the Fed would theoretically decline as institutions put their money elsewhere. However, the lack of Treasury bond issuance this year has caused the level of reserves to increase by about $500 billion since the start of the year, to $3.3 trillion, as banks park their money with of the Fed. If the level of reserves does not fall, this could push policymakers to maintain the QT longer.

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