Powell Says No to March Rate Cuts

The Federal Reserve kicked off its first 2024 meeting on Wednesday, January 31st, with market sentiment previously forecasting rates to hold steady.

Fed officials seem to have decided to stop raising interest rates aggressively, and kept rates unchanged at 5.25%-5.5% for a fourth consecutive meeting – a 22-year high.

What the federal funds mean to you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight.

Although that is not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates.

When the Federal Reserve keeps rates unchanged, it means they are not making borrowing money cheaper or more expensive at the moment. They do this mainly because they believe the economy is doing okay.

This decision could be influenced by various factors such as employment levels, inflation rates, and overall economic growth.

By keeping rates steady, the Fed aims to maintain stability in the economy – and subsequently encourage borrowing, spending, and investment without risking excessive inflation or economic slowdown. 

While policymakers are shifting their focus to when to start easing policy amid a favourable pullback in inflation, it has been made clear that they are in no rush to lower rates.

In what seems to be a still-solid economy, Chair Jerome Powell stated that Fed officials will remain cautious, and take their time before making any rate-related decisions.

Markets had already priced in the speculation of cutting interest rates at the upcoming meeting, which has been bluntly dismissed by Powell, confirming there is no plan for any immediate rate cuts.

It won’t be appropriate to cut rates until the committee has “gained greater confidence that inflation is moving sustainably toward 2%”, said the Chair.

 

In the press conference following the FOMC meeting, Powell further explained that he thinks a cut at the next meeting is highly unlikely at this stage – the reasoning being that Fed officials still need to see a continuation of the good inflation data that has been recorded lately.

He didn’t exactly dismiss the idea of a March rate cut, but he did reinforce the idea that any good news on the inflation front could potentially move up the timeframe.

Key dates to look out for: March 19-20.

Why does it matter? March marks a significant month for both the Federal Reserve and the markets in general, as direction toward a rate cut would be clearer by then.

On the trading front, we saw signs of a challenging day in financial markets as soon as yesterday’s trading session opened in New York. The downward momentum was initially driven by disappointing quarterly earnings from tech powerhouses Alphabet and AMD.

However, it was the Federal Reserve’s actions combined with Powell’s comments that sent Wall Street’s into its most chaotic day since September 2023.

While the decision to keep interest rates steady was largely expected by market participants, it was how the Fed and Jerome Powell reacted to traders’ optimistic anticipation of a March rate cut that sent ripples through markets.

Markets React

1. US stocks fluctuated during the briefing, hitting both session highs and lows.
2. S&P 500 slid by 1.6%.
3. Nasdaq 100 index underperformed, closing down 1.94%.
4. Dollar rose.
5. Gold initially fell following the decision, but managed to pick up back again later.
6. Gains in bond prices were not as significant as expected.