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Fed Holds Rates Steady and Downplays Talk of March Cuts

Feb 2 2024

The Federal Open Market Committee held its first meeting of 2024 this week, and though few expected a rate cut at this stage of the year, markets were anticipating that Chair Powell to signal that interest rate reductions might begin at the March meeting. The decision to hold rates steady for now, which currently sit in the 5.25%-5.50% range, came as expected. However, contrary to market expectations of an aggressive interest rate reduction programme this year, comments made by Powell now suggest that the first cut may not arrive until May.

The decision to keep interest rates at their current level will not come as a surprise, with markets having turned their focus to the March meeting even before the FOMC gathered on Tuesday this week. The annualised U.S. inflation rate stood at 3.4% in December, significantly down from the 6.5% rate in December 2022 and from the 40-year peak of 9.1% in June of the same year. While this decline indicates that the Fed’s policies have brought the indicator back towards its target of 2%, the general consensus ahead of the Fed announcement was that it would still be too early to cut rates.

From the Fed’s perspective, there is far more to be lost than gained by moving too early with its interest rate decisions. Economic growth in the U.S. came in at 3.3% in December alongside low unemployment rates providing a healthy impression of an economy which many predicted would fall into recession following such an aggressive interest rate hiking cycle. These figures do not tell the whole story; a cursory glance at U.S. Industrial Production or Manufacturing PMI data for much of 2023 reveals an industrial sector that was surviving rather than thriving under the strain of high borrowing costs. Nonetheless, January’s PMI data for the U.S. came in at 50.3, signalling expansion, and overall the picture still suggests the economy does not require the stimulus of rate cuts quite yet.

Us pmi data jan 24

Furthermore, the reputational risk of cutting rates too early is another factor for the Fed to consider. As suggested by ING, the Fed’s “credibility was damaged by its "inflation is transitory" assertion in 2021” given the aggressive interest rate hiking programme it soon after embarked upon. Cutting rates before all indicators suggest inflation is back under control could lead to a scenario where the Fed has to raise rates once more. Such a reversal could shatter confidence in the Fed’s decision making, and so it makes sense to postpone this move until more data is available to firmly support a policy change.

While there are clear reasons to keep rates steady for now, the news that the first cut will not arrive until May is the most significant development from the FOMC meeting. In his post-meeting press conference, Powell stated that he feels it is unlikely that “the committee will reach a level of confidence by the time of the March meeting” to reduce rates. At the start of the year, there was almost a 70% market confidence that the March meeting would lead to the target rate being cut to the 5.00%-5.25% range, according to the CME Fedwatch tool. As of today, that confidence has fallen to 41.5%.

The delay from the Fed means that other central banks may move ahead in their policy changes. The Bank of England announced on Thursday 1st of February that its rates would be remaining at 5.25%, but the voting pattern of committee members showed anything but a united perspective on the next steps. Six members voted to hold rates steady, while two voted for an increase to 5.5% and one backed a reduction to 5%. As noted by BBC News, this was “the first time there has been a three-way split on whether rates should rise or fall since the 2008 financial crisis.” The European Central Bank, meanwhile, is expected to reduce its rates from the current level of 4% in April as inflation across the Eurozone has fallen to 2.8%. The industrial manufacturing sector in Europe, even more so than in the U.S., would welcome lower borrowing costs after being battered by the combined forces of high energy costs and interest rates in recent years.

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