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Market Insights

January Fed Meeting Throws Cold Water on March

Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.

In this article we review: 

  • The Federal Reserve’s January meeting and why we believe the Fed is less likely to begin cutting rates at its March meeting   
  • Why we believe the language in the Fed’s statement and post-meeting commentary supports our current forecast of four quarter-point rate cuts during 2H 2024 
  • Our take on the January employment report and how that and other economic data could impact the Fed’s timing on future rate cuts
  • Reiteration of our current federal funds rate target range year-end forecast of 4.25–4.50% 

As expected, the Federal Reserve left the target range on the fed funds rate unchanged at 5.25–5.50% as it concluded its January 31 meeting. However, revised wording within the Fed’s statement and post-meeting commentary by Chair Jay Powell seemed to contradict market perceptions of a rate cut as early as the upcoming March meeting. 

Taking this background into account, we believe the following points are important for investors:

  • The Fed’s statement featured many changes. The Fed ushered in the new year with an atypical amount of statement revisions from its previous December version. These included verbiage on the economy’s recent strength, striking an entire paragraph on “tighter financial and credit conditions,” and language citing that the committee’s risks to achieving its dual mandate (employment and inflation), “are moving into better balance.”  
  • In our view, two changes were most notable. The first was the deletion of the Fed’s standard tightening cycle language, “in determining the extent of any additional policy firming,” which we view as a formal admission rate hikes have concluded. In turn, this deletion was then tempered by newly added wording, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving substantially toward 2 percent,” which we interpret to mean a March rate cut is less likely than recent market expectations had deemed it to be.
  • Directly casting doubt on a March rate cut. During the post-meeting press conference, Chair Powell specifically addressed the prospects of reducing the fed funds target range at the March meeting by commenting on the need to see more evidence that inflation is easing before "dialing back the restrictive level," and that at this recently completed meeting there had been "no proposal to cut rates." More directly, he also stated, "(March is) probably not the most likely case or what we would call a base case" for a potential reduction.
  • We maintain our forecast of four quarter-point rate cuts in 2H 2024 and a year-end fed funds rate target range of 4.25–4.50%. Prior to the meeting we were not expecting a March rate cut and believed the Fed will need to see more evidence of mitigating inflation and some economic slowing. While market expectations since the meeting have quickly shifted to May regarding the first rate cut in a new easing cycle, we still lean toward June in large part because that meeting will also include the Fed’s Summary of Economic Projections, featuring its participants’ assessment of appropriate monetary policy, aka the “dot plot” of expected future fed funds rate levels. 
  • Recent economic data further supports no policy action in March. With 353,000 new jobs added to the economy, close to twice consensus estimates, the January nonfarms payrolls report released shortly after the Fed’s meeting displayed impressively high growth along with an unchanged unemployment rate of 3.7%. Wage growth was also higher than anticipated at an annualized rate of 4.5%. Combined with early tracking of strong gross domestic product growth through the first month of the year, the current economic momentum increases the likelihood the Fed will not cut rates until the summer months.   

In conclusion, when considering the statement and post-meeting commentary of the Fed’s January meeting and recent economic data, we reiterate our forecast of four quarter-point rate cuts in 2H 2024 likely taking place between June and December and concluding the year with a fed funds rate target range of 4.25–4.50%. 


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