Federal Reserve to hold steady for now; will it signal cuts for next year?

Some day, the Federal Reserve's monetary policy decisions may once again be like watching paint dry. We're not there yet.

Very few anticipate a change in the federal funds rate target range, currently at 5.25%-5.50%, after the Federal Open Market Committee's meeting on Wednesday. Investors await signals on when the Fed might initiate rate cuts, examining projections in the dot plot and Chair Jerome Powell's post-meeting press conference.

In September's Summary of Economic Projections ("SEP"), the median projection for the fed funds rate was 5.1% at the end of 2024, implying a single rate cut from the current level of about 5.3%. Market expectations, however, suggest a significant disconnect, with forecasts of four or five 25-bp rate cuts in 2024.

Experts suggest the Fed may seek to temper enthusiasm for rate cuts by adjusting projections. This adjustment could impact long-term rates and stock prices, albeit as short-term counter trend moves to address overbought conditions in the market.

SA Investing Group Leader Dan Victor expects the dot plot to signal three rate cuts in 2024. While a dramatic stock selloff is not anticipated if the Fed signals fewer cuts than market expectations, the confirmation of a potential policy pivot is crucial amid concerns about inflation and economic resilience.

Timing and Economic Indicators
Various opinions on the timing of rate cuts exist, with Fitch Ratings suggesting a potential cut at the end of July. Olu Sonola emphasizes the Fed's likely cautious approach, waiting for additional jobs and inflation data before committing to a pivot.

In summary, the market is poised for potential shifts in the Federal Reserve's monetary policy, with a keen focus on the upcoming meeting's outcomes, dot plot signals, and economic indicators shaping future decisions.