US Fed meet begins today: What to expect from the central bank?

The two-day policy meeting of the US Federal Reserve is to begin on Tuesday, January 30, with the outcome due on Wednesday, January 31.

While it is anticipated that the Fed will maintain unchanged rates this time, there are high expectations that the US central bank will provide signals regarding its intentions to commence rate reductions.

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The majority of experts now anticipate the US Federal Reserve to initiate rate cuts starting in May or June. This expectation takes into account the resilient US job market and inflation, which continues to surpass the Fed's 2 per cent target.

"On one hand, inflation numbers continue to surprise to the downside. The Fed’s preferred gauge decelerated to 2.9 per cent in December, crossing below 3 per cent for the first time since early 2021, according to data published Friday. On the other, consumer spending continues to be surprisingly robust. It’s undoubtedly getting a boost from the downdraft in inflation, but the strength still may keep some worried that price pressures could mount once again," reported Bloomberg.

What to expect from the Fed's January meet?

While a status quo on interest rates is widely expected, experts say the focus will be on Fed Chair Jerome Powell's commentary on the inflation trajectory.

Deepak Jasani, Head of Retail Research at HDFC Securities is of the view that investors will watch the language of the Fed in the policy statement after the end of the central bank's first Federal Open Market Committee (FOMC) meeting of 2024, and in Fed Chair Jerome Powell's post-meeting press conference.

Jasani underscored that the recent statements from officials have suggested that the rate cuts will be carefully calibrated and not rushed.

"Taking cues from recent economic data, we feel the first rate cut by the US Fed will come in May/June, with the total quantum of rate cuts pegged at 75-100 bps in 2024," said Jasani.

Apurva Sheth, Head of Market Perspectives & Research and SAMCO Securities said it is almost certain that interest rates are going to remain unchanged in this meeting. However, the probability of rate cuts in March has also dropped below 50 per cent.

This indicates that the market anticipates rate cuts to commence only in the May meeting, with a current probability of 91 per cent.

"We believe that rate cuts are likely to happen only in the second half of 2024. Investors will want to focus on the Fed’s stance on rate cuts and the commentary thereof given that the GDP growth for the Dec-23 quarter was much stronger at 3.3 per cent instead of an estimate of 2 per cent," said Sheth.

The market has discounted a status quo on rates this time so the Fed outcome on January 31 may not influence the market mood significantly.

Gaurang Shah, Senior Vice President at Geojit Financial Services does not expect the market to react significantly to the Fed meet outcome this time.

"Depending upon the statements, the market should have a major reaction but like always in the past, I don't think it's going to have any meaningful impact on the markets. A major reaction could be possible depending upon which way the comment is," said Shah.

Shah said investors should focus more on fundamentals as it is difficult to predict when the Fed will start cutting rates.

"I think we will have to wait for the statements and outcomes of the future meets. It is difficult to preempt as to when they will start cutting the rates but I think we should concentrate more on our domestic data points," Shah said.

"With inflation showing signs of slowing down and the economy remaining relatively strong, we believe the Fed will keep the fed funds rate unchanged," said Vaibhav Shah, Fund Manager, Torus ORO PMS.

"Since the Fed pivot signal in early December, rates have firmed up on account of strong incoming data and hawkish comments from Fed Governors which have led to the realignment of expectation on rate cuts. It would be important to see whether the Fed maintains its dovish stance or surprises the market with a hawkish tone," said the fund manager of Torus ORO PMS.

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