FOMC meeting preview, January 30-31

Hold your horses
 

  • We anticipate the Fed will keep the federal funds rate unchanged at 5.25%–5.50% at the January Federal Open Market Committee (FOMC) meeting. This will likely represent the 13th consecutive unanimous vote since June 2022, and perhaps the last one as we anticipate more frequent dissents in the coming months.
     
  • The Fed’s tightening bias will likely disappear from the FOMC statement with the phrase “in determining the extent of any additional policy firming that may be appropriate” likely to be removed. Instead, Fed officials may prefer a more neutral tone such as the “in determining the extent to which monetary policy should remain as restrictive” or “in determining how long to hold monetary policy unchanged,” without committing to any specific timeline. 
     
  • The Fed’s summary of economic projections will not be updated at this meeting, and we anticipate Fed Chair Jerome Powell will refer to the December projections to support policy optionality. As a reminder, the Fed’s median rate expectations (the dot plot) indicates 75 basis points (bps) of rate cuts this year with the federal funds rate closing 2024 at 4.6%. 
     
  • The press conference will be scrutinized for any signal on when the Fed might start cutting interest rates. While Powell will not want to signal any precise timeline on the onset of rate cuts, the timing of policy easing will surely be the main point of discussion during the two-day meeting.

    • If policymakers’ sentiment is that they’re likely to wait until after March to make a rate cut decision, we believe Powell will favor a more hawkish tone and promote policy optionality, especially with markets continuing to price early and rapid rate cuts starting in March.
       
    • If, on the contrary, Powell wants to signal the March FOMC as being a “live” one, he will look to communicate that intent during the press conference with language such as “soon” or “at upcoming meetings.” 
       
  • While we believe the optimal decision would be to start easing policy in March, and some policymakers may agree, it doesn’t appear likely the majority will be ready to start cutting rates by mid-March. 
     
  • Why not? We should not forget that the Fed’s commitment to getting inflation sustainably back to the 2% inflation target remains unwavering, and rate cuts will be mechanically tied to inflation data. We anticipate some inflation bumpiness in the coming months so that while the three- and six-month personal consumption expenditures (PCE) inflation gauge moved below 2% in December, they might rebound slightly in January and February.
     
  • In short, there is little doubt that Fed policymakers are noticing the faster (and less painful) disinflationary process. Still, the ghost of Arthur Burns and legacy of Paul Volcker are very much present in the Eccles building. Since no official wants to be seen has having eased policy prematurely, the odds favor a careful approach.
     
  • We look for Powell to frame future rate cuts as policy recalibration with the Fed implementing nominal interest rate cuts in a lower inflation environment to maintain real interest rates stable.
     
  • Quantitative tightening (QT) will continue apace, but Powell will likely signal the onset of discussions on tapering QT.
     
  • We anticipate 100bps of rates cuts this year, coming at the May, June, September and December meetings, but faster disinflation could favor the Fed doing more cutting in H2.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.