Fed Interest Rate Cut Bets Skate On Thin Ice, Markets On Edge: FOMC Meeting Preview

The Federal Open Market Committee (FOMC) meeting announcement, set for Wednesday afternoon, stands as one of the most anticipated in recent memory.

Two years since the start of interest rate hikes, with the Fed bringing rates to their highest levels in over two decades, policymakers may now finally communicate an imminent start to cutting the cost of borrowing. The key questions that keep markets on edge revolve around when and by how much.

Currently, investors are assigning a 60% chance of a first rate cut in June, as per the CME Group FedWatch Tool, followed by additional cuts in September and December, totaling 75 basis points of cuts by year-end.

These projections align neatly with indications the Fed provided back in December when the “dot plot” suggested the possibility of three 25-basis-point cuts in 2024.

However, since the beginning of 2024, investors’ enthusiasm for Fed rate cuts has significantly waned. In January 2024, markets had priced in seven rate cuts for the year (or 175 basis points), but they have since revised their expectations downward.

Chart: Investor Rate Cut Expectations Dropped Sharply Since January

A string of inflation and job market data exceeding expectations has not only alleviated concerns about an economic slowdown or recession but has also highlighted the challenges in returning price pressures to the 2% target.

The questions about when and by how much the Fed will cut interest rates now loom larger than ever. The March FOMC meeting could provide critical insights from the updated dot plot and from Fed Chair Jerome Powell‘s remarks.

Here’s how Wall Street economists are preparing for the Fed meeting.

Fed Meeting: What Do Economists Expect

The median economist anticipates 75 basis points of Fed funds rate cuts in 2024, with rates projected to end the year at 4.6%. This suggests a de facto unchanged dot plot from December 2023.

Expectations suggest slight upward revisions to GDP and inflation forecasts for 2024, but no significant changes are anticipated to the Statement.

According to data collected by Market News, out-of-consensus views come from Barclays, JPMorgan, Nomura, and Standard Chartered. They foresee a rise to a 4.9% median for 2024, implying only two cuts for the year.

Deutsche Bank, Goldman Sachs, and Nomura anticipate fewer rate cuts further out in 2025 and 2026.

Goldman Sachs and JPMorgan expect an upward adjustment to the longer-run rate, known as the equilibrium neutral policy rate, increasing from 2.5% to 2.6%.

On tapering quantitative tightening (QT), the general expectation is for the Fed to cap Treasury runoff at $30B (compared to the current $60B) around mid-year, with an announcement likely in May or June.

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Image created using artificial intelligence with Midjourney.