ANALYSIS - US Federal Reserve to signal monetary policy path in first meeting of 2024

By Ovunc Kutlu

ISTANBUL (AA) – As inflation slows down and the American economy remains stronger than estimates, the US Federal Reserve’s first meeting of 2024 will signal the path of its monetary policy for the rest of the year.

The Fed’s two-day meeting will conclude on Wednesday, with the bank widely expected not to change its benchmark interest rate.

All eyes will be on Fed Chair Jerome Powell’s post-meeting press conference, as investors will focus on any hints about the direction of interest rates in the coming months.

Although Powell had long argued in the second half of 2021 that high inflation was “transitory” and would soon dissipate, both consumer and producer prices in the world’s biggest economy quickly climbed to their highest level in almost 41 years by the summer of 2022.

In order to fight record-high inflation, the Fed made a total of 11 interest rate increases from March 2022 through July 2023, carrying the federal funds rate to the 5.25%-5.5% target range – the highest in 22 years.

Annual consumer inflation in the US slowed down to 3% in June 2023, but picked up again to 3.4% in December.

The Fed’s preferred inflation indicator, core personal consumption expenditures (PCE) price index, dipped in December 2023 on an annual basis to 2.9%, down from the 3.2% year-on-year gain in November, and came in lower than the market expectation of 3%.

Despite the significant slowdown from the record 9.1% consumer inflation in July 2022, the latest figures are still above the Fed’s long-term inflation target of 2%.

- Soft landing achieved?

One of the biggest concerns of the Fed’s unprecedented monetary tightening was whether it could achieve a soft landing – a situation where a central bank raises interest rates too much and too high, leading to an economic slowdown, but avoiding a recession.

While the Federal Open Market Committee (FOMC) was rapidly raising interest rates throughout last year, Powell repeatedly became vocal about the issue, arguing that a soft landing could be achieved and the American economy could avoid a recession in a high interest rate environment, but did not rule out this possibility.

“There is little basis for thinking that the economy is in a recession now. There is always a probability that there will be a recession in the next year. It is a meaningful probability no matter what the economy is doing,” Powell said at his last press conference on Dec. 13.

“There are certainly risks. It’s certainly possible that the economy would behave in an unexpected way. It has done that repeatedly in the post-pandemic period.”

However, the latest gross domestic product (GDP) figures released last Friday proved that a soft landing could be on the horizon.

The American economy expanded 3.3% in the fourth quarter, beating market estimates of 2%, but it slowed down from 4.9% GDP growth in the third quarter.

Overall, the US economy grew 3.1% over the last year, also above expectations.

- When will rate cuts start?

On Dec. 13, the Fed indicated it could cut interest rates at least three times in 2024, by 25 basis points each, and could make an additional four rate cuts during 2025.

The central bank also penciled in three more rate cuts for 2026, according to its projection materials released in December.

Economists and analysts are now divided over when the central bank would make its first rate cut this year.

The probability of a rate cut of 25 basis points at the Fed’s March meeting stood above 48% as of Monday, according to the FedWatch Tool provided by the US-based Chicago Mercantile Exchange Group.

“Frankly, everything depends on the incoming data now, and there are a lot of potentially significant releases over the next few weeks that could swing the odds of a March rate cut in either direction,” London-based independent economic research firm Capital Economics said in a note last Thursday.

“We still think the Fed will lower rates by 25 basis points at that upcoming meeting,” it said, referring to the two-day meeting that will conclude on March 20.

Atlanta Fed President Raphael Bostic, however, said earlier this month that he expects the Fed to begin lowering interest rates in the third quarter of this year.

“If we continue to see a further accumulation of downside surprises in the data, it’s possible for me to get comfortable enough to advocate normalization sooner than the third quarter. But the evidence would need to be convincing,” he said at an event in the US state of Georgia on Jan. 18.

By evidence, Bostic was referring to macroeconomic data that will be released in the coming months – inflation, core PCE index, economic growth, job additions and unemployment.

The nonfarm payrolls and unemployment rate for December 2023 will be released this Friday, but the Fed will not be able to factor those in during its meeting ending Wednesday.

There is also the possibility that the FOMC participants may not pencil in the path of monetary policy on the Fed meeting’s official statement on Wednesday.

However, it will be difficult for Powell to dodge questions about this topic in the following press conference.

The Fed could also adopt a wait-and-see approach about the path of interest rates.

The bank is most likely to handle every meeting with the latest macroeconomic data and decide on rate cuts meeting-by-meeting, one at a time, just like last year when it was raising interest rates.​​​​​​​