In this week's regular March meeting, the Federal Open Market Operations (FOMC) will maintain its current interest rate policy. It will leave the Federal Funds Rate (FFR) unchanged at the current 5.25%-5.50% level, pushing interest rate cuts towards the middle of the year.
That's according to the CME'sFedWatch Tool, which calculates the probability of changes in this critical interest rate for the nation's monetary policy. This time, it points to a 99% probability of FFR remaining in the current range, up from 96% a week ago and 90% a month ago.
"I feel confident that the March meeting is a hold-the-course-on-rates event," Matt Willer, Private Asset Management expert, said. "Of interest will be the comments based on recent reports this week that signal inflation isn't on an orderly, consistent decline, but pockets are still running hot. Powell has been clear that they will hold the line until they are definitively satisfied that inflation is in check - at or around their target."
Still, Robert R. Johnson, Ph.D., CFA, CAIA, professor, Heider College of Business, Creighton University, sees a good chance that the Fed is cutting rates by the middle of the year. "Following the June 12 meeting, the FedWatch tool indicates that there is a 60% probability that the target Fed funds rate will be at least 25 basis points lower than it is today," he explained. "So, by mid-June, a rate cut (or more than one rate cut) is more likely than not."
The FOMC committee within the Federal Reserve System oversees the nation's Open Market Operations (OMO). It is a tool for controlling the economy's liquidity and interest rates by the central bank's dual mandate: steady inflation and high employment (low unemployment).
FOMC's decision to maintain interest rates at the current levels this time follows the release of the February Consumer Price (CPI) and Producer Price Index (PPI) reports last week, which showed that inflation remains elevated despite the Fed's tight monetary policy.
Meanwhile, a retail sales report released during the week showed that sales at the nation's retailers slowed down more than expected in February. Stubbornly high inflation combined with slowing retail sales point to the return of the stagflation narrative for the U.S. economy, which involves weaker economic growth coupled with high inflation.
"The recent data coming from the U.S. has only strengthened our conviction that the economy is now facing the genuine threat of stagflation," said Oliver Rust, head of Truflation. "Retail sales in February rebounded to 0.6% monthly growth, while the PPI Report also came in hot, pointing to sticky inflation."
Rust sees some parallels between today and the 1970s, when a war in the Middle East, an oil embargo, and the Vietnam War caused stagflation. "We are seeing similar economic conditions now, with geopolitical tension causing an increase in the oil price to $80 per barrel, while extreme weather is causing increases in the prices of food commodities like cocoa. At the same time, while economic growth will remain strong in the first quarter, it is expected to slow down to 2.1% while inflation is re-accelerating."
Stagflation binds the Fed, making it hard for policymakers to address it with conventional and unconventional monetary policy.
"This is a precarious situation for the Fed to find itself in since it makes lowering interest rates very complicated," Rust explained. "If it cuts rates to stimulate growth and alleviate the burden from indebted consumers, it risks fueling inflation further. In this environment, we're unlikely to see the start of interest rate cuts until June at the earliest."
James McCann, Deputy Chief Economist at Abrdn, agrees but joins the Wall Street consensus that sees three cuts this year. "However, Chair Powell will make it clear that further disappointments on the inflation front would mean that rates need to stay higher for longer," he stated.
Eric Croak, CFP, Accredited Wealth Management Advisor and President of Croak Capital, doesn't put a number on interest rate cuts. Still, he expects moderate rate reductions driven by inflation and labor market conditions.
"Historical trends suggest that if a recession is avoided, any decrease in the fed funds rate will be relatively moderate," he explained. "If inflation maintains its current slowing trend, the Fed will likely be more at ease with implementing rate cuts gradually, in line with current market expectations.
"On the other hand, a resurgence in inflation would compel the Fed to reduce the chances of cuts significantly – possibly pausing after just one or two reductions. Conversely, if signs of significant strain in the labor market, the Fed might accelerate its rate-cutting cycle to try to stave off a recession."
Melissa Cohn, the Regional Vice President of William Raveis Mortgage, is on the same side but sees the possibility of interest rate cuts pushed after the election.
Cohn says Powell remains steadfast in his rhetoric that they need to see more significant evidence that the rate of inflation is moving toward its target" before a rate cut happens. So, a rate cut will happen "this summer, or we're not going to see it until after the election," she said. "It would have to be either June or July."
