T. Rowe Price: FOMC to leave interest rates unchanged at 5.25%-5.5%

T. Rowe Price: FOMC to leave interest rates unchanged at 5.25%-5.5%

31 januari 2024

Fed
Rente (03)
By Blerina Uruci, US Economist, T. Rowe Price, expects the FOMC to leave interest rates unchanged at 5.25% -5.5%, in line with consensus and market expectations.

Her baseline view is for seven 25bp cuts this year starting in March for a total of 175bp worth of cuts. The central scenario would be for a 25bp cut at every meeting, but admittedly cutting cycles rarely go this smoothly and it is possible that some larger cuts and pauses will weave their way into the actual Fed funds rate path this year. Uruci assigns a 60% probability to this outcome.

A dovish scenario could frontload cuts as follows: a cut of 25bps in March followed by several 50bp cuts in May, June, and July before a pause to assess the effects on the economy.  Developments in inflation and the labor market would both have to show concerningly fast cooling for this to occur.  A benchmark for these indicators could be sustained core inflation prints showing run-rates further below the 2% target and payroll growth of less than or equal to 100k per month.

Together, these signs would illustrate underperformance against the Fed’s dual mandate of price stability and full employment implying that the FOMC must cut at a faster pace to avoid damaging the economy.  Urici assigns 25% probability to this outcome.

A hawkish scenario would likely include a slower pace of cuts starting with 25bp at the March meeting and continuing to ease at every other meeting. An acceleration in employment growth and stalling progress on core inflation (especially core services) would push me to make it my baseline. Urici would assign a 15% probability to this outcome.

A possible dovish surprise: the FOMC could decide to add language that says monetary 'policy is sufficiently restrictive'. This would be a strong indication that further hikes have a near zero probability and go against the idea that the Fed still wants to keep some optionality, which is why it is not Urici's baseline.

Press conference: Urici expects that going into the press conference Chair Powell will want to leave the market pricing as close to current levels as possible. Powell will want to leave the door open to a March cut, but a 50/50 probability is probably right about where he wants it to be given there are two more employment and inflation reports before that meeting.

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