Tonight, the Federal Reserve's first interest rate decision of the new year is out!
Wall Street thinksThe Fed will pause interest rate hikes for the fourth month in a row, but it may not send a clear signal of rate cuts at this rate decision, let alone commit to any timetable for rate cuts.
At 14:00 p.m. ET on Wednesday, January 31 (02:00 a.m. Beijing time on Thursday, February 1), the Federal Reserve's FOMC will announce its January 2024 interest rate decision, and in its first monetary policy statement of 2024, the FOMC will also announce its long-term goals and monetary policy strategy. Fed Chair Jerome Powell will hold a monetary policy press conference thirty minutes after the interest rate decision.
At that point, the market will focus on how the Fed views the recent economic strength and the timing of its rate cuts.
According to the analysisThe monetary policy statement may no longer hint at a rate hike, which is important for the future path of interest rates, butPowell's statement at the press conference will remain "cautious":
Satisfied with the recent decline in inflation, the labor market remains robust and economic growth is strongCentral banks are in no hurry to cut interest rates.As a series of recent economic data continues to highlight the strength of the US economy, the market has pushed back its expectations for the first rate cut from March to May.
In addition, whether the Fed will discuss when to taper QT at this meeting, as well as the "big change" of the FOMC voting committee, have attracted much attention from the market.
According to CME Group's "Fedwatch" tool, as of press time, the market is pricing in a nearly 98% probability that the Fed will keep interest rates unchanged for the fourth time in a row in January.
In addition, according to Wall Street, more than 10 Wall Street banks such as Goldman Sachs, Bank of America, Morgan Stanley, and JPMorgan Chase Nomura will keep interest rates unchanged in January.
If the outcome of tonight's FOMC meeting is in line with market expectations, the Federal** target range for January will remain at 525%-5.5%.
The market will look for clues of a near-term interest rate cut in the monetary policy statement released after the meeting.
There is ** wrote:
The Fed** is likely to take a symbolically important step this week by no longer hinting in its policy statement that interest rates are more likely to rise than fall.This is also the opinion of many analysts.
Deutsche Bank economist Matthew Luzzetti said the Fed would remove a paragraph from its previous statement in its monetary policy statement, opening the door to future rate cuts.
The wording reads:
Any additional tightening that may be appropriate is identified to bring inflation back down to 2% over time.For more than a year, this language has underscored the Fed's willingness to continue raising interest rates until it reaches its inflation target.
Luzzetti said in an interview that the change could amount to a fundamental adjustment to the direction of the FOMC's monetary policy. He noted that at the December meeting, no further rate hikes were expected, but now, the Fed is starting to discuss a rate cut.
Therefore, moving away from the obvious tightening attitude is a prerequisite for more actively considering when to cut ratesand opened the door to a rate cut in March.BofA and Barclays have similar views in their interest rate forwards.
Overall, Morgan Stanley's chief global economist Seth Carpenter said much of the January monetary policy statement would be similar to December, with some of the wording likely to be more neutral.
Carpenter noted
You can't deny the fact that inflation has come down significantly, and I don't think they want to do that either.Data released last week showed that the Fed's favorite inflation gauge, core PCE, rose at a year-on-year pace in December to a new low in nearly three years. On a six-month annualized basis, the indicator is **19%, lagging behind the Fed's 2% target for the second month in a row. Among the major Wall Street banks that have announced their interest rate forecasts, Goldman Sachs, Barclays, and UBS are all expected to cut interest rates by 25 basis points in March.On the other hand,I don't think there will be a big tagline that says "mission accomplished" (anti-inflation).
Analysts Anna Wong and Stuart Paul believe that the focus of the Fed's January meeting will be to clarify when and how to communicate about rate cuts and tapering of QT.
They said the FOMC will start cutting rates in March, if accurateThen Powell may send the final signal when he gives Humphrey Hawkins testimony to Congress in late February or early March.
And at this rate decision, Powell is likely to dismiss any expectations of a near-term rate cut, given that inflation is accelerating again later this year.
It is worth noting that a series of recent data releases have once again highlighted the strong momentum of the US economy, and the market has postponed the start of interest rate cuts from March to May.
For example, data released last week showed that the US real GDP in the fourth quarter increased by 3% year-on-year3%, far exceeding market expectations of 2%, and the U.S. economy will grow by 2 for the whole of 20235%, compared to 19%。According to CME Group's "FedWatch" tool,The probability of a 25bp cut in March has fallen to less than 50% from around 80% two weeks ago and around 100% at the end of December, and the probability of a 25bp cut in May has risen to more than 50%.
According to the analysis, the FOMC may also start discussing its 7$7 trillion balance sheet, including when to start tapering the QT program, but a decision is unlikely.
Dallas Fed President Logan said earlier last monthWith liquidity scarce in financial markets, central banks may need to slow the pace of balance sheet reduction.
Thomas Simons, senior U.S. economist at Jefferies, said:
The Fed is getting closer and closer to the lowest level of comfort reserves. At this point, QT should be tapered gradually.Nomura's team of analysts wrote in the report:
The FOMC is likely to discuss adjusting the pace of balance sheet reduction at this meeting. We expect Powell to respond to the Fed's recent comments that a slowdown in QT later this year is reasonable, but reserves remain abundant. As such, we believe the FOMC can be patient with a potential correction for now.It is also worth noting that the FOMC voting committee will also usher in the annual reshuffle in January. Cleveland Fed President Mester, Richmond Fed President Barkin, Atlanta Fed President Bostic, and San Francisco Fed President Daly were given the right to vote.
Chicago Fed President Goolsbee, Philadelphia Fed President Harker, Minneapolis Fed President Kashkari and Dallas Fed President Logan are no longer on the voting committee this year.
Although structurally, the FOMC voting committee in 2024 is more biased, according to the recent ** statement, compared with last year, the current FOMC is hawks who have the upper hand.
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