Fed weakens rate cut possibility for March

WASHINGTON/NEW YORK

The US Fed ended the possibility of further tightening in its monetary policy at its first meeting in 2024, and the bank signaled that interest rate cuts would unlikely start in March.

The Fed kept the policy rate unchanged in line with expectations, keeping it unchanged at a 23-year high of between 5.25% -5.50% after a two-day Federal Open Market Committee (FOMC) conference.

Although it made changes to its monetary policy decision text, it removed the possibility of “additional policy tightening” from the wording.

The statement emphasized that the economic outlook is “uncertain” and the FOMC remains extremely cautious of inflation risks, noting that it would not be appropriate to cut the policy rate until there is more confidence that inflation is moving sustainably toward the 2% goal.

Following the policy decisions, Fed Chairman Jerome Powell said FOMC members believe the policy rate is likely at its peak and it would be appropriate to start rate cuts in 2024 so long as the economic situation continues to be within expectations, and that he believes it to be unlikely that the confidence level required for a rate cut to be reached by the March meeting.

Investors’ hopes that interest rate cuts would start in March were shattered by Powell and a sell-off was observed in the markets.

In light of the developments, expectations that the Fed will keep the policy rate unchanged in March rose to 64% in money markets, while the expectation for a cut fell to 36%.

‘Financial markets were too aggressive in pricing in rate cuts as March’

Nancy Vanden Houten, senior economist at Oxford Economist, told Anadolu that Powell’s statements were largely in line with what she had in mind.

“We have been saying since December, that financial markets were too aggressive in pricing in rate cuts as soon as March, our forecast has been that the first rate cut will come in May and I think Powell’s comments align with that view. I think by the time of that meeting, more positive news on inflation will give the Fed that extra confidence it’s looking for before proceeding to lower rates,” she said.

She highlighted that more positive news on inflation in the run-up to the May meeting would give the bank the confidence it needs before starting cuts.

‘Rate cuts seem to start in June at earliest’

“By being backward looking and data-dependent rather than forward looking, the Fed could be too late in cutting interest rates to stave off a recession,” Desmond Lachman, senior fellow at US-based think-tank American Enterprise Institute (AEI), told Anadolu.

“Real trouble seems to be brewing in the commercial property sector because of high vacancy rates as employers allow for workers to work at least part of the week at home, trouble in the property sector could spill over into the regional banks that are very exposed to commercial real estate lending,” he said.

Lachman pointed out that the downside geopolitical risks to the recovery also increased, especially in the Middle East.

He underlined that the Fed did well by “opening the door to interest rate cuts later in the year” but he thinks the bank made a mistake by implying that the cuts would not begin until mid-year, though it seems that “the earliest that it will start cutting interest rates will be in June.”

Next move in interest rate decisions expected to be downward

The Fed continues to follow a “wait-and-see mode,” depending on the data, said Satyam Panday, chief US economist at New York-based credit rating agency, S&P Global Ratings.

Panday said although the next move in interest rates is now officially expected to be downward, there is still a question about timing, noting that the bank needs to “see current (dis)inflation momentum to continue a little longer.”

“We continue to maintain June as our first projected ease,” he added.

Fed seems to be ‘in no hurry’ for rate cuts

The Fed seems to have eliminated the tightening trend as if it is “in no hurry to cut interest rates,” said James Knightly, Padhraic Garvey and Chris Turner, economists at the Dutch bank ING Group.

The analysis suggests that May, rather than March, is a more likely starting point for policy easing.

*Writing by Emir Yildirim from Istanbul