As the Fed prepares for its upcoming policy-setting meeting, all eyes are on the central bank's stance regarding interest rates amidst recent signs of rising inflation. With expectations of maintaining rates unchanged, investors eagerly await updates to the Fed's forward projections, particularly the dot plot, which outlines individual committee members' rate forecasts.
How tight is the current policy
The Fed meets this week to decide whether, when and by how much it should cut rates later this year. A key question they must answer: Just how tight is their monetary policy? Judging by the experience of builders such as Sandlin and consumers’ overall resilience, not very tight. For Fed officials, that argues against cutting rates much, or soon, especially after two months of firmer-than-expected inflation.
Rates Projections
In December, policymakers hinted at least three quarter-point rate cuts in 2024. However, with inflationary pressures intensifying, there's a palpable concern among investors that the dot plot might lean towards a more hawkish outlook. The fear is that the Fed could revise its projections downward, signalling fewer rate cuts than initially anticipated. Such a move could dampen the recent equity market rally, injecting volatility into both fixed-income and equity markets.
Any deviation from the expected rate projections could trigger market reactions. Maintaining expectations for multiple rate cuts would be viewed positively by investors, while fewer projected cuts could lead to market turbulence.
Clues on QT
In addition to interest rate projections, investors also anticipate clues about the Fed's quantitative tightening (QT) campaign. The March meeting could mark the beginning of discussions on tapering the central bank's efforts to inject liquidity into the economy, a measure initiated during the Covid-19 pandemic.
Dallas Fed President Lorie Logan and other major Fed speakers have hinted at the possibility of tapering QT before reducing liquidity. We anticipate a preliminary plan to be announced at the March meeting, with implementation starting in May. This anticipated tapering of QT by 50% until August, followed by discontinuation, is expected to alleviate pressure on Treasury issuance, thus influencing bond prices in the market.
Thus, Fed's upcoming meeting holds significant importance for financial markets, particularly regarding interest rate projections and the potential tapering of quantitative tightening. Any deviation from market expectations could lead to heightened volatility across asset classes.
Fullerton Markets Research Team
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