What to expect from Wednesday’s Federal Reserve policy meeting

The Federal Reserve has loads to do at its meeting this week, but ultimately it might not do much to change the outlook for monetary policy.

In addition to publishing its rate of interest decision after Wednesday’s meeting, the central bank will update its economic projections in addition to its unofficial forecast for the direction of rates of interest over the subsequent few years.

As expectations have modified sharply this yr concerning the Fed’s direction, this week’s two-day session of the Federal Open Market Committee might be closely watched for any clues concerning the direction of rates of interest.

However, the general impression is that policymakers will stick to their recent message, which emphasized a patient and data-driven approach, without rushing to cut rates of interest until there is bigger visibility on inflation.

“They are making it clear that they are clearly not ready for interest rate cuts. They need some more data to be sure that inflation is getting back on target,” said Mark Zandi, chief economist at Moody’s Analytics. “I expect they will confirm three rate cuts this year, which suggests the first rate cut will come in June.”

Markets have had to continually adapt to the Fed’s approach, limiting each the timing and frequency of expected cuts this yr. Earlier this yr, investors within the federal funds futures market expected the rate-cutting campaign to begin in March and proceed until the FOMC cut the speed six or seven times in quarter-percentage-point increments.

The market has now pushed the deadline to a minimum of June, anticipating only three cuts from the present goal range of 5.25-5.5% of the Fed’s benchmark overnight lending rate.

Fluctuating expectations will make how the central bank delivers its message this week much more essential. Here’s a fast have a look at what to expect:

While the quarterly chart of individual member expectations is somewhat cryptic, this meeting will likely be all concerning the dots. In particular, investors might be watching because the 19 FOMC members, each voting and non-voting, provide their rate of interest expectations through the tip of the yr and into 2026 and beyond.

When the matrix was last updated in December, the dots showed three cuts in 2024, 4 in 2025, three more in 2026, after which two more sooner or later to bring the long-term federal funds rate to about 2.5 %, which the Fed considers “neutral” – neither promoting nor limiting growth.

Doing the mathematics, it could take two FOMC members to adopt a more hawkish stance and reduce rate cuts this yr to two. However, this shouldn’t be a standard expectation.

“It only takes two single dots to move up to move the median higher in 2024. It only takes three dots to move the long-term point up 25 basis points,” Citigroup economist Andrew Hollenhorst said in a client note. “However, the combination of inconclusive activity data and slowing year-on-year core inflation should be enough to keep the dots in place and [Fed Chair Jerome] Powell continues to say the commission is on track to gain “greater confidence” in cutting interest rates this year.

The FOMC will soon conduct a largely academic vote on what to do with interest rates now.

Simply put, the chances of the committee voting to cut interest rates this week are zero. A statement at the last meeting all but ruled out an imminent move, and public statements from virtually every Fed speaker since then have also ruled out a decline.

This statement may indicate a possible thaw in the outlook and a correction of the bar that the data will have to exceed to justify future cuts.

“We continue to expect the Fed to cut interest rates in June, although we do not expect officials to issue a strong pro-or-con stance after the March meeting,” wrote Paul Ashworth, chief economist for North America at Capital Economics.

In addition to the “scatter chart,” the Fed will release quarterly updates on the economy, particularly on gross domestic product, inflation and the unemployment rate. Collectively, the estimates are called Summary Economic Projections, or SEP.

Again, there’s little expectation that the Fed will change its December outlook, which reflected lower inflation and GDP growth. During this meeting, the main target might be solely on inflation and its impact on rate of interest expectations.

“Although inflation has reached a bumpy level, activity data suggests the economy is not overheating,” wrote Bank of America economist Michael Gapen. “We think the Fed will continue to forecast three rate cuts this year, but that is very likely.”

Most economists consider the Fed could raise its GDP forecast again, although not dramatically, while also barely raising the inflation outlook.

On a broader scale, markets will likely expect the Fed to follow its latest plan for fewer cuts this yr – but still cuts. There will even be some expectations about what policymakers will say about reducing the balance sheet. Powell indicated that the problem might be discussed at this meeting and a few details may emerge about when and the way the Fed will slow and ultimately stop the reduction in its bond holdings.

It won’t just be watching Wall Street either.

Although this shouldn’t be official policy, most central banks world wide follow the Fed’s example. While the U.S. central bank says it’s moving cautiously since it fears inflation could rise again if it falls too quickly, its global counterparts are taking notice.

Amid mounting concerns about economic growth in some parts of the world, central bankers also want some type of go-ahead signal. Higher rates of interest put upward pressure on currencies and drive up the costs of products and services.

“The rest of the world is waiting for the Fed,” said Zandi, the Moody’s economist. “They would prefer that their currencies do not depreciate and put further pressure on inflation. So they would really like to see the Fed start leading the way.”