FOMC preview: How many cuts and when will they start?

The number of Federal Reserve rate cuts expected this year has dwindled and the first one isn’t likely before June, analyst said, as inflation numbers continue to come in hotter-than-expected.

While the market was initially expecting six or seven 25 basis point cuts this year, Gary Quinzel, vice president of portfolio consulting at Wealth Enhancement Group, said he expects “no more than three” beginning in June and it’s “very likely we could see less.”

“I’ve always been in the camp that there was no reason to cut rates in the first half of the year,” he said. “There’s just really no reason for the Fed to cut at this time.”

A cut at the March meeting won’t happen, Quinzel added, “and there’s not much greater chance in May.”

Since the Fed is data-dependent, “the data justifies a status quo approach for the time being.”

Quinzel pointed to “modest growth expectations, the robustness of the labor market, and of course, inflation numbers are still more elevated than what they’d like to see” to suggest the Fed will be “patient.”

Higher consumer and producer price index numbers last week didn’t change his opinion since the Fed is concentrating on super core inflation, “which excludes not only food and energy but also shelter.”

With super core showing inflation around 4.6%, he said, the Fed knows “the battle against inflation has not been won yet.”

As for the Summary of Economic Projections, Quinzel said, “If anything, you might see the median of the of the dot plot get more dispersed, because you might have a little more indecision, you might have a little more wavering, especially as we get up closer to the election cycle.”

And while the Fed remains “apolitical, we can’t ignore the fact that this is a political year, an election year,” he said. “And the simple fact is, as we get closer to the election, that is likely going to come into play. And that’s another reason why I think if we do get one, maybe two cuts in June and/or the following meeting, as we get closer to the end of the year, they might end up going on pause.”

As for the post-meeting statement, Quinzel wants to “see better clarity” about “what might actually increase their level of confidence.”

“We expect little change to the FOMC statement and the projections, with the median dot remaining at three cuts,” Morgan Stanley economists wrote in a note lead authored by Chief U.S. Economist Ellen Zentner. “It would take just two participants to change from three cuts to two for the median dot to move to a total of two cuts in 2024, underscoring that the risk tilts toward fewer rather than greater.”

Fed Chair Jerome “Powell is unlikely in the ‘two camp,” they said, “and we think will push to keep the median at three.”

The press will hit Powell on inflation, and the chair will say cuts are expected “at some point,” Morgan Stanley said.

Eric Vanraes, head of fixed income at Eric Sturdza Investments, said the Fed has every reason to make at least one cut” with inflation around 3% now, “especially since we all know that the last mile to 2% will be the longest.”

If the Fed doesn’t cut by June, it’s “basically admitting that when inflation was double digits the Fed made a mistake by failing to take rates somewhere closer to 8%,” he said.

Although three cuts remains Vanraes’ base case, he’s closely watching what Powell says about the bank term funding program. “If it ends as planned, it means that the Fed believes that commercial real estate isn’t a systemic risk to the banking sector. But if he says this program will be extended, it’s proof that the credit crisis is deeper and has become a major concern.”

The first cut will come in June, according to Wells Fargo Securities Chief Economist Jay Bryson, senior economists Sarah House and Michael Pugliese, who had been expecting a downward move in May.

They expect 100 basis points of cuts this year and next.

“In light of the recent slate of data and Fed-speak, we see few changes to the post-meeting statement after a meaningful rework following the January meeting,” they wrote in a note. The SEP projections will not change materially, they said.

“We think the core PCE inflation median for 2024 will rise by a tenth or so, putting it closer to the midpoint of the central tendency range from December,” they said.

While they believe the median dot for rates will remain at 4.625% this year, “the risks are skewed toward a higher median given the distribution of the prior dots and the recent run of inflation data. Similarly, we expect no change to the 2025 and 2026 median dots, though here too we think the risks are skewed to the upside.”

And while the Fed will likely cut rates at some point this year, Alejandra Grindal, chief economist at Ned Davis Research, said “a long pause is not off the table given that economic and inflation data has been surprising to the upside.”

However, if the Fed cuts and then needs to raise rates, she said, “that could have negative implications for equities.”

“The risks are skewed toward a less dovish outcome, with the potential for the median Fed dot for 2024 to rise to 4.9%, or only two interest rate cuts for 2024,” said Matthew Weller, global market analyst at StoneX.

While Powell wanted more reports of low inflation, all major inflation measures have risen while the labor market remains strong, he said.

“In past environments where the labor market was historically strong, inflation was above the Fed’s target (and arguably rising), and when the central bank hadn’t touched interest rates in eight months, the Fed would be looking to HIKE, not cut interest rates,” Weller said.

Also a factor is the presidential election, with the Fed historically “hesitant to cut interest rates just before a presidential election to preserve the perception of its political independence, meaning that the central bank may be focused on a small window — this summer— to tweak interest rates before entering a de facto ‘quiet period’ until its December meeting.”

Jay Woods, chief global strategist at Freedom Capital Markets, questions whether last week’s “hotter than expected CPI and PPI numbers” will hurt the chances for a June rate cut.

“Clearly a pause is in order for the sixth consecutive meeting, but what does it mean for meetings going forward?” he asked. “Will Jay Powell’s usual talk of ‘one data point at a time’ continue or will he acknowledge things are getting sticky?”

Powell’s tone can shift from mildly dovish to “slightly hawkish,” Woods said. “This could be the first meeting given recent data that the tone could give himself some wiggle room and go cautiously hawkish, but I doubt he will.”

Instead, Woods expects Powell to repeat, “we are close” to a rate cut.

The dot plot “could be the story driving the bus until March 29th^{‘s PCE release,” he said.}

The Fed is expected to cut rates twice, beginning in June, according to Gary Pzegeo, head of fixed income at CIBC Private Wealth U.S.

A 25-basis-point increase in the dot plot projections wouldn’t be shocking, he said. Also possible are “small increases in growth and inflation projections.”

While the post-meeting statement will change only marginally, Pzegeo said, Powell’s “press conference will likely reflect some concern over the pace of disinflation in services and a need for patient policy.”