Federal Reserve Meets Wednesday: Will Powell Signal Rate Cuts In 2024?

The final 2023 policy meeting for the Federal Reserve will most likely end with the decision to hold interest rates where they are. As dull as this appears on the surface, it will not be a “ho-hum” moment for financial markets.

Market participants are looking for signs that cement the view that rate hikes are done with, and that they can expect rate cuts to begin in the first half of 2024. Any other interpretations coming from Wednesday’s Fed statement will be a huge disappointment and would likely spur sharp market reactions.

Economic analysts now expect the Federal Reserve to hold policy settings at this week’s meeting, accompanied by a more dovish tone in the statement. This would be “on message” to expectations that the Fed will deliver a first-rate cut at least by May.

“At the Wednesday meeting, we expect the Fed to take the initial steps in changing its communication from hawkish holds to dovish holds,” said Mark Cabana, rates strategist at Bank of America.

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Data Supports More Dovish Expectations

Data since the November meeting has pointed to moderation in economic activity, slowing inflation and — Friday’s non-farm payrolls report aside — a cooling labor market.

The dollar index (DXY) has fallen 2.8% since the November meeting, while the Invesco US Dollar Index Bullish ETF (NYSE:UUP), an exchange-traded fund that tracks dollar longs, is down 1.8%. Its counterpart, the Dollar Index Bearish Fund (NYSE:UDN) has gained 3.1% over the same period.

Higher interest rates support the dollar, and the DXY has been on the decline since early October – when data began to show inflation was slowing and markets heard the first hints of dovish rhetoric from the Fed’s Open Market Committee (FOMC) members.

At the same time, equity markets have been rallying in hopes of lower rates. Since Oct. 27, when it began its most recent rally, the SPDR S&P 500 (NYSE:SPY), an ETF that tracks the benchmark U.S. equity index, has rallied an impressive 12%.

Or Will The Fed Push Back?

While expectations are for rate cuts to come, there’s still a few analysts who believe the Fed could push back on these hopes on Wednesday.

The question is, they say, can the Fed afford to let the markets…