Pre-Event Market Commentary for the FOMC Meeting on 31/01/24

The FOMC meeting will be the marquee occasion of a blockbuster few days of high-risk events this week. Megacap tech earnings sandwich a Fed which is fully expected to stand pat on policy. But what the statement and language from Chair Powell says about the central bank’s future intentions regarding the timing and scale of incoming rate cuts will be crucial for all financial markets.

The most recent FOMC meeting in December was viewed as the much-vaunted “pivot” meeting with a dovish shift in Fed forecasts. In turn, money markets priced in an aggressive cycle of rate cuts through this year.

But economic data has been solid with both activity and labour market figures beating expectations. The flip side is the central bank’s favoured inflation measure which has now been running around the Fed’s 2% target for two straight quarters. The US consumer is also expected to come under pressure as uncertainty and a weakening employment picture eventually come into play, with policy currently highly restrictive.

A rate cut in March is now more or less a coin toss, having been nailed on only a few weeks ago. The dollar has appreciated over two percent this year as those expectations of policy easing have been reined in.

Nevertheless, there are still at least five rate cuts priced in for this year. This contrasts with the recent FOMC projection for just three, so something will have to give very soon.