Market Briefing: Fed not lined up for a rate cut just yet
The FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%, as expected. It did so with a new rotation of Fed presidents voting in 2024: Bostic (Atlanta), Barkin (Richmond), Daly (San Francisco), and Mester (Cleveland).
Notwithstanding the new representation, there was nothing surprising in that vote, and, we would argue, in a directive that implied the Fed isn't ready to cut rates just yet.
There was some hope that the directive might be more explicit in signaling a near-term, rate-cut move, but it wasn't. Instead, the directive declared that, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
What this implies is that the Fed isn't predisposed at this point to cut rates in March, and it may not be predisposed to cut rates in May. It needs to see more data to determine if there is going to be a change in policy course.
We say that isn't surprising because various Fed officials noted in recent weeks that they think the Fed can proceed carefully before cutting rates. To be sure, Fed Chair Powell has been clear that the Fed doesn't want to repeat the mistake of the 1970s and cut rates too soon, only to see inflation rev up again.
Separately, there wasn't any indication either that the Fed is going to curtail its quantitative tightening activity. Its holdings of Treasury securities and agency debt and agency mortgage-backed securities will continue to be reduced in accordance with its previously announced plans.
The market will now wait even more anxiously to hear what Fed Chair Powell has to say at his press conference, which begins at 2:30 p.m. ET. What it saw in the directive, though, implied the Fed wants to stay the policy course since it isn't convinced yet the inflation risk has been sufficiently tamed.
The 2-yr note yield, at 4.23% before the release, is at 4.26% now. The 10-yr note yield, at 3.96% before the directive, is at 3.97% now. The probability of a 25-basis points cut at the March meeting was 56.4% just before the directive was released. It is at 45.2% now, according to the CME FedWatch Tool.
The Dow Jones Industrial Average is down 0.2%; the Russell 2000 is down 0.7%; the S&P 500 is down 1.0%; and the Nasdaq Composite is down 1.5%.
