May 25, 2024

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FOMC preview: ‘See You in September’?

4 min read
FOMC preview: 'See You in September'?

For those of a certain age, a tune sung by The Happenings — See You in September — might resonate with regard to the Federal Reserve. Most analysts now expect the Fed to hold rates in a range between 5.25% and 5.50% until September, with some concern there will be no rate cuts this year.

“The Fed is certainly not going to be overly concerned about the growth backdrop” at this week’s Federal Open Market Committee meeting, said BMO Chief Economist Douglas Porter. He expects Fed Chair Jerome Powell “will still point to the surprising robustness of spending trends in his press conference. His tone is likely to be the highlight, given that there is no debate on the rate decision at this stage.”

BMO now believes the first rate cut will occur in September (they had been projecting a July move), but still clings “to two rate cuts this year (the market is toggling between one and two),” Porter said.

Fed Chair Jerome Powell “will still point to the surprising robustness of spending trends in his press conference,” said BMO Chief Economist Douglas Porter. “His tone is likely to be the highlight, given that there is no debate on the rate decision at this stage.”

Morgan Stanley wrote in a note, “Powell was very clear ahead of the blackout period that progress on inflation had stalled.” As a result the post-meeting statement “may adopt a more hawkish tilt to match and explicitly acknowledge the lack of progress in recent months.”

In his press conference, they said, “Powell will stress that it’s appropriate to give restrictive policy further time to work.”

The FOMC will hold rates at this meeting, Wells Fargo Securities Chief Economist Jay Bryson, and senior economists Sarah House and Michael Pugliese said in a note. However, they “expect the committee to announce a slowdown in the pace of balance sheet runoff” with Treasury securities runoff “capped at $30 billion/month in June compared to the current runoff cap of $60 billion/month.”

“The start of 2024 has largely been one of removing overly aggressive anticipate Fed cuts,” said John Kerschner, head of U.S. securitized product at Janus Henderson Investors. A combination of “stubborn inflationary pressures, and a more resilient and stable U.S. growth environment” led to market jitters, he said.

The latest read of core personal consumption expenditures, the Fed’s preferred inflation measure, “confirmed that inflation persistence is continuing but isn’t accelerating like some feared,” Kerschner said. And while inflation remains higher than the Fed would like, “if progress does continue, it still may be reasonable to assume one, maybe two, cuts in 2024.”

Payden & Rygel Chief Economist Jeffrey Cleveland agreed bond market’s earlier expectation of seven rate cuts this year “has been erased somewhat,” with projections down to “maybe one or two cuts.”

As a result, he said, “yields have drifted higher. So, I think that’s why you see your three-month Treasury bill above 5%. It’s a reflection of a repricing, if you will, of the Fed.”

“As we close the books on the first quarter of 2024, we are once again struck by the contradiction between careful data analysis and changing narratives regarding market direction,” said Charles Curry, senior portfolio manager of U.S. fixed income at Xponance. “In our 4Q23 review, we noted that the idea of futures markets and market participants expecting six to seven interest rate cuts … made little sense absent a complete economic meltdown.”

He suggested there may be no rate cuts this year, although as of April 17 the market was still pricing in two.

“The disinflationary process, while ongoing, has fallen short of expectations in recent months,” noted Christian Scherrmann, U.S. economist at DWS Group. “We still expect the disinflationary process to continue, albeit with higher volatility than anticipated.”

As a result, Fed rate cuts will arrive “somewhat later than initially projected,” he said.

The Fed remains patient on policy with rates in restrictive territory, Scherrmann said. “To restore neutrality in their guidance, we believe the ‘inflation fight first’ narrative requires some refreshment. This could be achieved by reminding markets that if inflation rates were to rise again, another round of rate hikes could be on the table.”

And while a rate hike is not their base case, Scherrmann said, “we believe that central bankers, with this hawkish attitude, are buying the necessary time for the stuttering disinflation process to proceed.”

Satyam Panday, chief U.S. economist at S&P Global Ratings, said, “The ongoing strength of the economy, combined with the reacceleration of core inflation in the first three months of the year has raised the possibility of a first rate cut to come in fall instead of summer.”

Additionally, the odds have risen that there won’t be any cuts this year, he said.

Friday’s “strong PCE print at 2.7% closes the door to any rate cuts in the short term,” said Giuseppe Sette, president of Toggle AI. “Rates are on hold for longer.”

Phill Nelson, director of asset allocation at NEPC, said, “Despite the Federal Reserve’s bias toward cutting interest rates, investors should brace themselves for the potential that there will be no cuts from the Fed in 2024 due to consistently elevated inflation data getting increasingly priced into markets.”

The Fed is focused on how wage gains are impacting potential inflation and also eying “the core services sector where we are still seeing stickier inflation.”