Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today, I'm joined by Director of Market and Economic Research, Phil Neuhart, to answer some of the questions we're hearing most often from clients. By the way, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.
So, Phil, last week, we got a couple of inflation reports, the CPI and the PPI, both of which were a little bit disappointing. Going into the Fed's meeting this week, what are some things that you're looking for?
Phil: Yeah. It's an important Fed meeting. And as you mentioned, both Consumer Price Index and Producer Price Index surprised to the upside last week—in other words, higher-than-expected inflation. That continues to push back the chances of how many times the Fed cuts this year. As of this recording, Fed fund futures are pricing roughly a 55% chance the Fed cuts at the June meeting.
A month ago, that was 75% chance. Early this year, the expectation was they would be cutting it this meeting, the March meeting, the meeting this Wednesday. So what you're seeing is the likelihood of Fed cuts just keeps getting pushed back. We were never believers that the Fed would be cutting as soon as March, but the market was expecting that. Futures are pricing basically three cuts this year. Early in the year, that was seven or eight. So we are seeing cuts removed from expectations.
Looking to the statement and press conference on Wednesday, it's an important one. What does the Fed do in the statement to provide any changes to their guidance? Importantly, Chairman Powell's press conference, which is always interesting—does he give any indication of when the Fed might begin cutting rates? The last press conference in January was the beginning of the end of the idea that the Fed would be cutting at the March meeting—so very important.
The other thing that happens in this meeting that only happens quarterly is the Federal Open Market Committee's summary of economic projections. And this is where committee members submit their projections on various economic data points and importantly the federal funds rate. The last summary of economic projections in December indicated—or the median indicated—three cuts this year. The market, of course, expected much more than that, and now the market has moved to where the Fed is.
Does that number change on Wednesday? Could we see the FOMC, for example, move to saying "We're only going to cut a couple times this year"? I think that's in the cards. Our expectation is that the Fed is cutting two or three times this year. Maybe if data really cooperates, we get up to four, but not the seven or eight times expected early this year. So a lot to watch, certainly, Wednesday afternoon. Markets will be tuned in.
Amy: Phil, in the summary of economic projections, what would make the committee members move their expectation from three cuts down to two cuts?
Phil: Yeah. Well, really, the story has been that inflation, while far better than where we were, is still elevated. It's not just consumer inflation, producer inflation—it's also wages. We're still seeing pretty robust wage gains. So the data is potentially pushing them that direction. I don't think it's a slam dunk. When the Fed says they're data dependent, some view that as a cop-out, but I just view it as a fact. They have to watch the data and where it's going, and they're going to adjust their path of potential rate cuts based on the data.
Amy: So, Phil, how might markets react to any decision coming out of the Fed?
Phil: Yeah. Look, it's really going to depend on their tone. It's very unlikely they make any changes to the overnight rate at this meeting. The Fed funds rate is extremely likely to remain unchanged.
But let's say the tone were to be hawkish. Well, we've already seen interest rates yields on treasuries rise rapidly this year as the market has come to terms with the fact that the Fed would not be cutting as much as expected. So a hawkish stance—in other words, a tighter monetary policy stance—might mean that rates need to move up even more.
Let's say the opposite were to happen, and the Fed surprises and it sounds a little bit more dovish instead of—in other words, easier monetary policy—we'd expect the opposite to happen. We could certainly see yields react on the downside there after really a sharp move higher this year.
When you look at the stock market, a little bit more separated just because the stock market is also focused on fundamentals, which have seemed pretty good and certainly have been improving since last year—whether you look at GDP growth expectations, CEO confidence, et cetera. So the stock market certainly will react and does react to the idea of rates going higher, but that could be short-lived, assuming fundamentals that feed into corporate earnings remain robust.
Amy: Thanks for watching. We hope you found this information helpful. For more information, please visit FirstCitizens.com/Wealth.
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