FED Pivot to Neutrality: A Wait-and-See Approach?

The Federal Open Market Committee (FOMC) will meet this Tuesday and Wednesday, facing a challenging decision regarding interest rates. This marks their third monetary policy meeting of 2024. Unlike the first two meetings, where post-meeting statements hinted at potential rate cuts later in the year, the “data-dependant” Federal Reserve (the Fed) may opt for a wait-and-see approach during the April-May decision.

This possibility of the Fed adopting a neutral stance arises from April’s inflation figures, which indicated that prices are not coming down as expected.

Inflation Heats Up, Rate Cuts Cool Down

Market expectations for rate cuts have cooled significantly in the face of persistent inflation. As reported by Bloomberg, the initial optimism for a dovish pivot by the Fed has waned due to stubbornly high inflation readings.

The change in sentiment suggests that the Fed will not be able to implement any rate cuts as inflation remains unchecked. There are indications that inflation is nearing the Fed’s 2% target. For instance, the latest PCE inflation indicator revealed a 2.7% increase in prices over the preceding 12 months ending in March, showing an acceleration compared to the previous month’s 2.5% reading.

A Wait-and-See Approach

Given the ongoing concern about inflation, it is anticipated that the FOMC meeting scheduled to conclude at 2 p.m. EDT on Wednesday, May 1st, will lead to the Fed adopting a wait-and-see approach.

The neutral stance would involve holding interest rates steady indefinitely while closely monitoring economic data, particularly inflation indicators. The changed stance would also give the Fed more flexibility. By maintaining a neutral monetary policy, they can respond to unexpected data without causing market upheaval.

What to Watch

There is a lot going on, and knowing what to watch is more complicated than usual. While PCE inflation measures are climbing, U.S. economic growth has been tapering. This has some concerns that a hard landing may be in store.

2024 is also a presidential election year, and historically, the Fed tends to step back from significant actions midway through such years. However, investors should remember that after an FOMC meeting last year, Powell suggested that stimulating an economy is easier than slowing it down. This implies that if desired outcomes are not achieved, Powell may not be overly worried about maintaining higher interest rates for an extended period.

Key Takeaway

The FOMC meeting this week is likely to prioritize inflation concerns, potentially leading to a neutral stance on interest rates. This wait-and-see approach would be reflected in the Fed’s post-meeting statement, where Chair Powell and the other Fed governors offer guidance on the future trajectory of monetary policy.