According to Powell, its is unlikely that the Fed will be ready to cut interest rates at the March meeting.
The United States Federal Reserve (Fed) announced on Wednesday, a decision to hold interest rates steady. In addition to maintaining the 5.25-5.50% range, the US central bank also said a rate cut at its next meeting in March is unlikely.
The Fed’s announcement damped the market’s mood as the CME FedWatch Tool revealed that investors and traders had priced in a 25-basis-point rate cut by March at 65%. As of this writing, the CME FedWatch Tool shows the market’s target rate probability of a rate cut to 5.00%-5.25% has fallen to 36%. The market still has a 64.0% probability that the Fed will maintain current rates at the March meeting.
The Fed’s official statement notes that economic activity is improving, with job gains recorded and low employment. It also states that although inflation has eased over the last year, it is still high.
Fed May Keep Rate Steady Until 2% Inflation Is In Sight
According to the FOMC, the plan is still to ensure that inflation hits 2% in the long run. Unfortunately, the Committee believes that the economic outlook is uncertain and plans to remain attentive to risks of inflation. On rate cuts, the FOMC states that decisions will be made according to current data. The statement notes:
“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Fed Chair Jerome Powell reiterated this after the meeting, stating that it is not likely the Committee “will reach a level of confidence by the time of the March meeting to identify March as the time to do that.”
According to Bill Adams, the Chief Economist at Comerica Bank, the Fed is trying to tread carefully. Adams said that the Fed was “badly burned” in 2021 and 2022 because it assumed that high inflation would be temporary. The Comerica exec believes that the apex bank wants to avoid the same mistake and will wait until it is clear that 2% inflation is within reach.
Stock Market Reacts
Following the Fed’s announcement, the Dow lost 317 points and closed at 38,150, after falling 0.82%, the worst performance since December. There were large percentage plunges in the S&P 500 and the Nasdaq Composite, both falling 1.61% and 2.23% respectively. It was the Nasdaq’s worst day since October, and the S&P 500’s worst since September.
Despite announcing no rate cut, the FOMC is unlikely to increase rates. According to Powell, the “policy rate is likely at its peak for this tightening cycle”. He also signaled an indication for a rate cut if the economy improves as expected. However, the Chair said subsequent rate cuts “would depend on the data”. According to Powell, the FOMC will only continue to cut rates if the data supports the move.