DWS: Preview of Fed meeting

January 26, 2024

Christian Scherrmann, U.S. Economist at DWS, looks ahead to next week's Fed meeting:

'Typically, the first FOMC meeting of the year is more about organizational matters, such as the rotation of voters, rather than groundbreaking policy shifts. However, after the markets identified a dovish pivot at the December meeting and central bankers went to great lengths to push this back, the upcoming meeting is also a great opportunity to further manage expectations.

Most likely, central bankers will want to re-emphasize their data-dependent 'wait and see if inflation really cools further' stance, but not without acknowledging the recent progress on disinflation. In our view, any optimism about progress on inflation is simply a justification that interest rates are indeed high enough – at least for now.

However, such talk needs to be well nuanced, as markets tend to overreact to anything that might be perceived as dovish. Any further unwanted easing of financial conditions as a result of such an interpretation unnecessarily complicates matters for central bankers.

We are already seeing rate cut expectations showing up in more upbeat sentiment indicators. In any case, inflation remains 'elevated' and robust labor markets are not yet qualifying a shift of expectations toward an accelerated cooling of core services prices.

Looking ahead, inflation, especially core services, may be a bit bumpier than in the past, at least for a while. In any case, many risks remain on both sides, and we know from the last meeting that they are the subject of a lengthy discussion.

In terms of housekeeping, this year's voting rotation may shift the average stance a bit more to the hawkish side, further supporting a higher for a bit longer narrative. Another issue that will most likely come up as a housekeeping item is the outlook for quantitative tightening. This topic was quite prominent in the minutes of the December meeting but was not actively discussed at the last press conference.'