The Federal Reserve is anticipated to maintain interest rates for the fourth consecutive meeting, keeping the range between 5.25% and 5.5%, a level reached in July that represents a 22-year high. Speculation about a rate cut in March persists, with investors assigning roughly a 40% chance to this possibility. However, most Fed officials have emphasized that it’s too early to speculate on such a pivot, and Chairman Jerome Powell may refrain from signaling an imminent rate cut.
The Federal Open Market Committee (FOMC) statement is expected to see some tweaks in interest rate guidance, potentially moving away from a reference to a possible “firming” of rates and adopting a more neutral stance such as “stance of policy.” The statement is likely to resemble the one published in December, with the FOMC reaffirming its long-term goals and monetary policy strategy.
Powell, in the press conference following the FOMC meeting, may face questions about potential rate cuts in March and whether the committee’s median forecast for three quarter-point reductions in 2023 still accurately reflects officials’ views. Investors currently anticipate five or more rate cuts, but Powell might push back against any near-term changes, especially given concerns about a potential re-acceleration of inflation later in the year.
In addition to rate-related discussions, Powell might address various banking issues, including moves to encourage financial institutions to borrow from the Fed’s discount window. The FOMC may also start discussing its $7.7 trillion balance sheet, specifically when to begin tapering its quantitative tightening program. However, a decision on this matter is unlikely during the current meeting.
The meeting also marks a rotation of new voters among the central bank’s regional presidents. While these new voters may lean slightly more hawkish than their predecessors, no dissents are expected at this meeting. Overall, the Federal Reserve faces the challenge of balancing the potential need for accommodative measures against the risks associated with inflation and the economic environment.
