What to expect from the Fed in its first meeting of 2024?

This Tuesday and Wednesday will see the first meeting of the year of the Fed. Both national and international managers are clear that the Federal Open Market Committee (FOMC) will be very cautious in relation to the relaxation of monetary policy.

We leave you, below, with the perspectives that fund managers handle in view of this week's Federal Reserve meeting.

Benoit Anne, Director of the Investment Solutions Group at MFS Investment Management

Market life is a cycle. And so are investor emotions about the Fed. First, there was fear. Then, there is indifference. And next, there will be anticipation.

We have now exited stage 1: fear. Indeed, whatever the Fed says this week, even if the Fed Chairman tries to maintain a semblance of hawkishness, investors won’t be too scared. It is too early to claim victory on inflation (it would be complacent to do so anyway). Therefore, we expect some persisting hints of tough language at this week’s FOMC. But there is nothing to worry about. The macro backdrop is as good as we have seen in a very long time, characterized by diminished recession risks and favorable disinflation dynamics.

In other words, we have entered the “indifference” stage of our investor emotion cycle, which essentially downgrades the significance of this FOMC as a market event. Going forward, we will definitely pay attention and we will listen, but no disaster is likely to happen. How long will the indifference stage last? It could last “for some time”. That phrase is precisely the key signal to look for this week in the official Fed statement. If the “for some time” language is maintained, that means that the Fed is in no immediate rush to switch to rate cuts.

If however “for some time” is omitted, there is a high probability that there will be a rate cut announced at the March meeting. For now, the Fed funds future market is still somewhat cautious about pricing in a rate cut in March whereas the May rate cut is already in the price.

Irrespective of the “for some time” phrase being dropped out or not, the current macro backdrop is already supportive of global fixed income, and the good news is that the Fed will do nothing to derail that. For areas of potential risk, investors now have to look elsewhere. On that list, we have politics and geopolitics, as well as the risk of overheating.

More importantly, the valuation landscape looks tricky in some pockets of global fixed income, especially after the strong rally. If you are an active portfolio manager, it is time to look at relative value and dislocations. If, however, you are a long-term investor, the good news is that the entry points for global fixed income continue to be compelling by historical standards.

Cristina Gavín, head of fixed income and fund manager, Ibercaja Gestión

Once the bullish cycle of rates has ended, the interest in the Federal Reserve meetings will focus in 2024 on the moment of cycle change and the start of the decline in intervention rates.

At the beginning of January we knew the minutes of the meeting of December 13, where the different members of the FED showed no hurry to start lowering rates. If we add to this the geopolitical tensions accentuated with the Red Sea crisis that we have been experiencing in recent weeks and the effects that this can have on the evolution of prices, it leads us to anticipate that the Federal Reserve will be very cautious in terms of the relaxation of monetary policy. The growth data for the first quarter of 2024 of the American economy that have been known, and that have surprised on the upside, are additional arguments for this caution that we comment.

With all these arguments, although the market discounts a first drop for May, we are less aggressive and we do not believe that the Federal Reserve will start the process of lowering the intervention rate before June of this year. And certainly the pace of declines will be much less aggressive than what the markets discount today.

James McCann, deputy economist, abrdn

The Fed will ask the market for patience this week. Although the central bank is increasingly optimistic about the possibility of inflation returning to the target set, it is not yet ready to lift its foot off the accelerator. In fact, it will keep monetary policy at bay in January and, probably, will give another slight setback to the market's expectations of a cut in March.

This caution reflects the desire to be certain that inflation is falling sustainably, especially in the midst of new risks to global goods prices due to events taking place in the Red Sea. In addition, activity data does not indicate to the Federal Reserve that it should relax its monetary policy quickly. In fact, the economy is still functioning well for now despite high interest rates.

However, the relaxation of monetary policy is imminent, and we currently expect the first rate cut to occur in May. From then on, we foresee a vigorous easing cycle, reflecting our view that the economy will suffer more in 2024.

Gilles Moëc, Chief Economist, AXA IM

No expected changes in rates at 5.5%, but watch for signals Powell may give about March, priced in with a 50% probability. Last year we opined several times that miracles happen, but it would be brave to link the macroeconomic baseline to one of them. Monetary tightenings usually trigger major recessions. We are forced to consider that this rare event may be materializing in the United States. The Q4 GDP performance should be measured against a monetary policy rate that is more than double the Fed's own estimate of its "cruising level". It is increasingly difficult to resort to explanations centered on "transmission delays". Federal funds interest rates are in restrictive territory, using this "cruising level" as a yardstick, since the fall of 2022. This should have started to bite by then.

It is no wonder that this "no landing" scenario accompanied by lower inflation is being hailed by the market. The most positive aspect of the December PCE data is that, on a 3-month annualized basis, core inflation has fallen below 2% (1.5%). This has happened once on this side of the Covid crisis in August 2023 (1.6%), so caution should be essential, but in the current context of speculation about the imminence of a rate cut, this fuels market exuberance. At the end of last year, we railed against the market's aggressive expectations of rapid rate cuts. Since then, investors have become much less sure about March as a starting point (12 basis points discounted last Friday, i.e., a probability of almost 50%, compared to a maximum of 26 on December 22), but after last week's inflation data, the May hypothesis has gained even more traction, with 34 basis points discounted. We remain unconvinced by the amount of cuts being discounted. We still expect the start to occur only in June, and by then the market is pricing in more than two 25 basis point cuts (52 basis points).

Christian Scherrmann, economist for the USA, DWS

The first meeting of the year of the Federal Open Market Committee (FOMC) of the Federal Reserve usually focuses more on organizational issues, such as the rotation of voters, than on radical policy changes. However, after the markets identified a pessimistic turn at the December meeting and central bankers did everything possible to delay it, the next meeting is also a great opportunity to continue managing expectations. Most likely, central bankers will want to reiterate their data-dependent stance of "wait and see if inflation really cools down more", but not without recognizing recent progress in disinflation. In our opinion, any optimism about progress on inflation is nothing more than a justification that interest rates are, in fact, high enough, at least for now.

However, this discourse must be well nuanced, as markets tend to overreact to anything that can be perceived as pessimistic. Any further unwanted easing of financial conditions, as a result of an interpretation of this kind, unnecessarily complicates things for central bankers. We are already seeing that rate cut expectations are reflected in more optimistic confidence indicators. In any case, inflation remains "high" and the strength of labor markets does not yet nuance a change in expectations towards an accelerated cooling of basic service prices.

Looking ahead, inflation, especially that of basic services, may be a bit more turbulent than in the past, at least for a while. In any case, there are still many risks on both sides, and we know from the last meeting that they are the subject of a long debate. As for internal matters, this year's voting rotation could tilt the average stance a bit more towards restrictive policies, which would further support a bullish narrative for a little longer. Another issue that will likely be discussed in the internal debate are the prospects for quantitative tightening. This topic was prominent in the minutes of the December meeting, but was not actively discussed at the last press conference.