Brace Yourself for Disappointing News From the Fed

All eyes are on the Federal Reserve this week as its members gather for their two-day policy meeting. One point – the only point, really – on which the market is hoping for clarity is the timing of its interest rate cuts and how many there will be.

It is widely expected that Fed officials will keep the rate unchanged and signal that they still need further evidence that inflation is returning sustainably to their 2% target. The only unknown is its future forecast.

For the most part, the market and economists have come to accept the likelihood that the earliest the Fed will begin to reduce rates is in June. And there is a dawning realization that it is more than possible that the Fed will only reduce rates twice this year, instead of the promised three cuts.  But could the news be worse?

First, let’s start with some fundamental assumptions. Barclays believes the Fed will likely raise its 2024 core inflation forecast to 2.6% from 2.4%. It also expects the Fed to lift its estimate of economic growth this year to 1.8% from 1.4% in December. Those numbers would not support an argument for rate cuts.

It is also helpful to understand the Fed’s motivation and remember its mission: the Fed typically cuts rates amid a deteriorating economy to try to prevent a recession, Vincent Reinhart, chief economist at Dreyfus-Mellon and a former Fed economist, told The Associated Press.

But the US economy is currently healthy. The only reason the Fed is considering rate cuts is because inflation has fallen from a peak of 9.1% in June 2022, he said.

“The Fed is driving events, not events driving the Fed,” Reinhart said. “That’s why this task is different than others.”

But if the Fed doesn’t move soon, its window to do so may soon close, Jim Bianco, president of Bianco Research, told CNBC’s Fast Money yesterday. “I’m in the camp that the Fed does not change policy in the summer of an election year,”  he said. “If they don’t pull the trigger by June, then it’s November [or] December at the earliest — only if the data warrants it. And, right now, the data isn’t warranting it.”

There is evidence that the much-anticipated June rates could be already off the table. CNBC pointed out that the CME FedWatch tool showed yesterday that expectations for a quarter point rate cut in June dropped below 50%.