La Française: The first rates cut is coming!

January 29, 2024

The Federal Open Market Committee (FOMC) is widely expected to keep policy rates unchanged at the January meeting. We believe dovish Fed chairman Powell will leave the door open to a potential interest rate cut in March, depending on data.

Please find below what we expect:

• The target range for the Fed’s benchmark rate to remain unchanged at between 5.25% to 5.50%.
• The Fed Chair Powell to announce that the Fed will start to cut interest rates soon, eventually in March. The labor market is in better shape and the underlying inflation is slowing especially with the 3 and 6-month annualized core Personal Consumption Expenditures Price Index (PCE) (the Fed’s preferred inflation gauge) below the 2% target.
• The Fed to adopt a careful and data dependent approach to calibrate the magnitude of the rates cut. 
• On balance sheet reduction, as suggested by the minutes of the December 2023 FOMC, the Fed to confirm preliminary discussions guiding the end of Quantitative Tightening (QT) to ensure a sufficient supply of reserves to meet bank demand without clearly indicating what is the ample-reserves regime. We believe Chair Powell will underline that there are no signs of stress in the financial market and reserves are still ample. Consequently, Mr. Powell will probably indicate a gradual process to end QT without giving any timeline at this stage.

In summary, we believe the Fed will allude to the timing of cuts at this meeting. Jerome Powell will probably keep his dovish rhetoric which surprised markets at the December 2023 press conference as the Fed is becoming more confident that inflation is moving back sustainably to the 2% PCE inflation target.

Nevertheless, he will remain cautious relative to the magnitude of cuts in 2024 by reaffirming the 75 basis points rates cut as implied in the December 2023 projections even through the Fed will make monetary policy decisions on data. This meeting may lead the US interest rate curve to steepen, the dollar lower and support risky asset prices.