March Fed Meeting Preview: When Will The FOMC Pivot To Interest Rate Cuts? (2024)

Investors are anticipating that the Federal Open Market Committee will keep interest rates at current levels at its upcoming meeting on March 19 and 20.

The FOMC will likely opt to keep its fed funds target range at a 22-year high of 5.25% to 5.5%. It will also likely continue to allow assets to roll off its $7.5 trillion balance sheet.

Keeping rates steady would be part of a Fed strategy that aims to tame inflation while achieving a “soft landing” for the U.S. economy. The goal would be to drop inflation to around 2% without triggering a U.S. economic recession.

On optimism that inflation is trending in the right direction, the S&P 500 Index has notched a 6.75% total return year-to-date. But several red flags have popped up in recent weeks, suggesting that the last leg of the Fed’s battle with inflation may be more difficult than anticipated.

Timing the First Rate Cut

Many investors doubt the Fed will cut rates during the first half of the year.

The bond market is currently pricing in a 95% chance the Fed will maintain interest rates at current levels in March and only a 5% chance it will cut rates by 25 basis points, or bps, according to CME Group. The FOMC has not changed its target rate range since July 2023.

John Kornitzer, founder of the Buffalo Funds and a manager of $472 million Buffalo Flexible Income Fund (BUFBX), typifies many investors’ expectations that the FOMC will not change its rates in March.

He says, “I expect the Fed to leave interest rates at 5.25% to 5.50% at its upcoming March meeting. I have advised my clients that the Fed won’t begin cutting rates until inflation is under control at 2%.”

Paul Schatz, president of Heritage Capital and vice president of the National Association of Active Investment Managers, also does not believe that the FOMC will change its rates in March. He says, “My thesis is that the FOMC will make no rate cuts in March, nor any in May and it’s unlikely in June too.”

However, some bond investors do expect a springtime cut. The bond market is pricing in a 23.95% chance the Fed will cut rates by at least 25 bps by its May meeting, says CME Group.

Signs of Strength

Prospects for rate cuts depend on the economy achieving a balance between overall U.S. economic strength and avoiding excessive strength, which fuels inflation.

The Federal Reserve is expected to continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature and roll off its balance sheet each month.

The Federal Reserve’s balance sheet has dropped from a record high around $9 trillion in May 2022 to around $7.5 trillion at the end of February 2024, but it remains well above its pre-pandemic size of $4.2 trillion in late February 2020.

The Federal Reserve has been shedding Treasury securities from its balance sheet because it feels the economy is strong enough to withstand a reduction in its Treasury buying, which increases money supply and helps prop up the economy.

Economic Projections

The FOMC will also update its long-term U.S. economic growth projections, which include forecasts for gross domestic product growth, unemployment rates, interest rates and inflation.

The Fed’s most recent economic projections in December called for:

• 2024 U.S. GDP growth of 1.4%.
• An unemployment rate of 4.1%
• Three interest rate cuts by the end of the year

The Fed also cut its 2024 growth forecast for the core personal consumption expenditures price index, or PCE, its preferred measure of inflation, from 2.6% to 2.4%. The core PCE inflation number excludes volatile energy and food prices.

In December, 11 of the 19 FOMC members projected the upper end of the Fed’s target interest rate range would drop to 4.75% or lower by the end of 2024, but those expectations have likely changed in recent months.

Investors will be paying close attention to how low the FOMC now sees interest rates falling in 2024 and will be listening for any hints about when those rate cuts could begin.

Stubborn Inflation

Unfortunately, the Fed still has work to do to bring inflation levels back in-line with its long-term target of 2%.

In late February, the Commerce Department reported the core PCE price index was up 2.8% year-over-year in January, a slight decrease from the 2.9% gain reported in December.

The Labor Department also reported the consumer price index, or CPI, was up 3.1% year-over-year in January, above the 2.9% increase economists were expecting.

Bill Adams, chief economist for Comerica Bank, says so-called “sticky” inflation categories have been slow to react to the Fed’s tight monetary policy measures.

“January saw the expected jump in core PCE inflation reflecting higher shelter costs and health care service fees reported earlier in the month in the CPI report. The momentum that built up in inflation over the last few years is still causing elevated increases of sticky prices that change relatively infrequently,” Adams says.

Is the Economy Solid?

The U.S. economy has remained mostly solid despite the Federal Reserve’s aggressive tightening. Unfortunately, a strong economy and labor market may be making the last mile of the Fed’s inflation battle even more difficult.

On February 2, the U.S. Labor Department reported that:

• The economy added 353,000 jobs in January, far exceeding economist estimates of 185,000 jobs added.
• The U.S. unemployment rate remained unchanged at 3.7% for the third month in a row.
• Average U.S. wages were up 4.5% from a year ago and up 0.6% compared to December.

The past two months have been the first back-to-back months in which the U.S. economy has added at least 300,000 jobs per month since June and July of 2022.

The labor market remains tight, but U.S. corporations are seemingly taking rising costs in stride.

Fourth-quarter earnings season has been better than expected, and analysts are forecasting year over year earnings growth of 4.5% in the first quarter of 2024.

Is a Recession Coming?

Recession concerns on Wall Street have dissipated in the past year, but the New York Fed still projects a 61.4% chance of a U.S. recession sometime in the next 12 months.

Some investors have grown concerned about the S&P 500’s valuation after the index hit new all-time highs in early 2024.

Jeffrey Buchbinder, chief equity strategist for LPL Financial, says corporate America is putting up good enough growth numbers to justify the recent stock market gains.

“If companies can deliver near-consensus earnings estimates in 2024, buoyed by big tech, and the Federal Reserve can engineer a soft landing as inflation continues to gradually ease, then we believe stocks stand a good chance of not only adding to year-to-date gains through year-end, but also keeping the price-to-earnings ratio around 20, which we view as fair based on LPL Research’s macroeconomic outlook,” Buchbinder says.

In The Fed’s Own Words

In the weeks since the last FOMC meeting, several Fed members have provided hints for investors about what they can expect from the March meeting.

The FOMC released its previous meeting minutes on February 21, and the Fed’s language strongly suggests members are concerned with the dangers of jumping the gun on its pivot to rate cuts. In the release, the Fed said it will not be cutting rates until members have “greater confidence” inflation is moving toward 2% and highlighted “risks of moving too quickly” on rate cuts.

In testimony to Congress on March 6, Fed Chair Jerome Powell reiterated that FOMC members are acutely aware of the risks of easing monetary policy and cutting interest rates too quickly.

“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” Powell said.

In a speech on March 1, Federal Reserve Governor Christopher Waller said the FOMC should proceed “carefully” with its ongoing balance sheet reduction but noted that the current runoff pace of $95 billion per month is “not a problem.” Waller said the banking sector has seemingly digested the drop in Fed asset holdings well and noted “we can continue to reduce our holdings for some time.”

Also on March 1, Federal Reserve Governor Adriana Kugler said she is “cautiously optimistic” the Fed can achieve its inflation goals “without significant deterioration of the labor market.”

Yung-Yu Ma, chief investment officer at BMO Wealth Management, says even a delayed Fed pivot to rate cuts may not be enough to slow down the stock market rally.

“Nothing bad has been able to stick to the markets for long––such as upside surprises in inflation data and delayed Fed rate cut expectations,” Ma says. “The labor market has remained healthy, and the market may be thinking that rate cuts are now icing on the cake rather than a necessary condition for a sustained rally.”

Between now and the beginning of the FOMC meeting on March 19, the Fed will get a couple additional important data points on the health of the U.S. economy. The Labor Department releases its February U.S. jobs report on March 8 and its February CPI inflation reading on March 12.

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