Fed holds rates again – but the only way is down

Touches on scenario for possible cuts but wants more reassurance that inflation is coming to heel.

01 February 2024

The Federal Reserve (Fed) kept rates on hold at its 31 January meeting, much as expected, at the federal funds target range of 5.25 – 5.5%. This is the seventh month in a row that rates in the US have been held steady following the last hike in July last year. After the perceived pivot we saw in December from Fed Chair Powell that the next moves in rates would probably be cuts rather than further hikes, markets have priced in much of this optimism, with the odds on a rate cut in March standing around 50% just before the meeting.

Chair Powell therefore had two options in his press conference, to either further fuel the bullish mood in bond and equity markets and allow financial conditions to remain looser for longer, or to rain on their parades. As usual it was somewhere in between. Stating that policymakers still need to have greater confidence that inflation is moving sustainably toward the 2% target before cutting rates is perhaps the most notable change in language from the last meeting as it at least references a possible scenario for cutting rates which has not been implied previously. However, the timing is still key and the Fed continues to confound markets by providing no definitive guidance on when that will be, such is their want since 2022.

Probabilities of a March cut bounced around above and below 50 as the press conference proceeded, with traders trying to infer every nuance of Powell’s mixed messaging. With some softer inflation prints over the next two months, the March meeting, only 48 days away, is obviously very much alive. But if I were a betting man, my money would still be on a May rate cut. The Fed after all is just that bit more cautious following the inflation scare of the last few years.