The Federal Reserve is expected to maintain current interest rates following its policy meeting on Wednesday. The key concern for investors is whether policymakers still anticipate three rate cuts by 2024, as indicated in the December dot plot. However, recent inflation data and cautious remarks from Fed officials have cast doubt on this projection, leading investors to adjust their expectations for rate cuts.
Fed Chair Jerome Powell has stressed the importance of sustainable inflation reaching the 2% target before implementing rate cuts. The market sentiment has shifted from predicting six cuts at the start of the year to now expecting three cuts beginning in June. Even the likelihood of a June cut has decreased in recent weeks. The Fed, which last raised rates in July, will announce its decision at 2 p.m. ET, followed by a press conference by Powell at 2:30 p.m. ET, where updated forecasts on inflation, GDP growth, and unemployment will be released.
In addition to rate projections, investors will be keen to hear about the Fed’s strategy to reduce its balance sheet. The central bank has been unwinding its balance sheet by letting bonds mature, with the question now focusing on when this pace will slow down. Policymakers aim to prevent any turmoil in the financial markets, similar to previous attempts to reduce the balance sheet. This move comes as the Fed continues to navigate economic conditions amidst global uncertainties.