This week, American investors are on the brink of a reality check as Federal Reserve officials prepare to reveal their updated forecasts for interest rates.
The pressing question lingering in investors’ minds is whether policymakers will uphold their projection of cutting rates three times in 2024, despite persistent inflation surpassing the targeted 2% mark.
The preceding week on Wall Street was tumultuous, marked by volatility fueled by recent data indicating sustained inflationary pressures throughout February.
Investors, who had factored in an initial interest-rate cut by June, are now apprehensive that the Fed might postpone such actions given the mounting evidence.
The general expectation is for the central bank to keep its policy rate within the 5.25% to 5.5% range after its two-day meeting concludes on Wednesday.
Attention will then shift to the release of the Fed’s latest Summary of Economic Projections, with a keen focus on the eagerly awaited “dot-plot.” This visual representation outlines individual policymakers’ forecasts for the future trajectory of the fed-funds rate.
Thierry Wizman, a global FX and rates strategist at Macquarie, suggests that although the Fed is inclined towards implementing easing measures around midyear, the upcoming Federal Open Market Committee (FOMC) meeting may prolong the observation period by one or two more cycles.
Wizman speculates that Fed Chair Jerome Powell might emphasize the need for “a little bit more” evidence confirming the sustainability of disinflation before contemplating rate cuts.
Wizman highlights that the recent slowdown in the pace of disinflation could lead Fed officials to revise upward the median “dot” for 2024 and 2025. According to Wizman’s analysis, policymakers initially envisioned a cumulative 75 basis points of cuts in 2024 and an additional 100 basis points in 2025 during the Fed’s December policy meeting.
However, market sentiment has shifted, with Fed-funds futures traders now converging on the expectation of three quarter-point cuts in 2024, down from initial forecasts of six or seven at the beginning of the year, as indicated by the CME FedWatch Tool.
Despite growing worries about inflation, the stock market has shown remarkable resilience. Following the February Consumer Price Index (CPI) report, the S&P 500 notched its 17th all-time high, driving the large-cap index to a 7.3% year-to-date gain.
Similarly, the Nasdaq Composite has surged by 6.4% in 2024, while the Dow Jones Industrial Average has recorded a 2.7% increase over the same period, according to data.
As investors prepare for the Fed’s updated interest rate projections, uncertainty looms over whether the central bank will stick to its previous guidance of multiple rate cuts amid sustained inflationary pressures.
Despite inflation concerns, the stock market has maintained its upward momentum, indicating a certain level of confidence among investors.
