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So much for the interest rate cut in March.

Fed Chairman Jay Powell said essentially the same thing in the press conference following the Fed’s last meeting on Wednesday:

“. . . Given the strong growth, strong labor market and falling inflation, the Committee intends to proceed cautiously and consider when we should begin to unwind our hawkish stance.

We will be data dependent and look at each meeting individually. Based on today’s meeting, I would like to say that I do not think it is likely that the Committee will reach a level of confidence by the March meeting to identify March as the right time to do this. But that remains to be seen. . . If you ask me about the near future, I hear it as March. . . That’s probably not the most likely case or what we would call the base case.”

Now markets are pushing forward with their pricing of rate cuts. According to CME data, Fed fund futures at the March meeting imply a rate of around 5.28 percent, which is within the current policy range of 5.25 to 5.5 percent.

Bank of America strategists believe the chance of a rate cut in March is 30 percent to 35 percent, up from 40 percent on Tuesday.

And Powell’s comments clearly had an impact – Goldman Sachs provides this handy chart showing how the March Fed Funds futures contract traded during the day:

Earlier in the day, after a slightly weaker-than-expected labor cost index report (+0.9% instead of +1%) and signs of problems in the regional banking country, pricing pointed to a more than 50 percent chance of a cut in the next one FOMC meeting.

That was quickly undone by Powell’s comments, and now GS is calling for the Fed’s first rate cut of 25 basis points in May instead of March:

We believe the best explanation for today’s meeting is that FOMC participants with differing views have agreed to probably start a little later, probably in May rather than March.

We have therefore postponed our first rate cut forecast from March to May, but continue to expect five rate cuts in 2024 and three more in 2025. We now expect the FOMC to make four consecutive rate cuts in May, June, July and July will hold September meetings before slowing to a quarterly pace and adding a final cut in December this year, as shown in Figure 2.

BofA has pushed back its forecast further and now predicts that the Fed’s first rate cut will occur in June. The bank expects three 25 basis point cuts this year and 100 basis point cuts next year:

In our view, financial markets are pricing in a political mistake. Risk assets immediately suffered after Powell said March was not the base case, and markets are now pricing in a virtually 100% chance of a 25 basis point rate cut at every FOMC meeting this year starting in May. If the Fed wanted to reduce market expectations for easing, it has failed. And markets don’t seem to agree with a gradual pace of rate cuts once the Fed begins.

“Policy error” is a pretty broad term for a two-month delay, but financial markets are calculating a fairly rapid pace of cuts next year, as BofA points out:

Markets may say the Fed has to choose between “sooner and slower” and “later and faster.” The latter is currently being voted on. We agree that the risks to our new starting position are trending in this direction.

The Fed has also delayed a full discussion on slowing its balance sheet contraction until the March meeting, and BofA and GS are now both forecasting May for the start of the QT end.

Overall, the delay means US banks will have to wait a few months longer than hoped for deposit costs to ease.

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