Market Reacts to Powell’s Statement: March Rate Cut Unlikely, Focus Shifts to Future Cuts

The Market Shifts Focus After Fed Chair’s Statement on March Rate Cut

Introduction

In a recent news conference, Federal Reserve Chair Jerome Powell made it clear that a rate cut in March is unlikely. This statement has resulted in a shift in market expectations, with traders reducing the probability of a March easing. However, the market still believes that rate cuts will occur later this year.

Market Reaction and Expectations

The market had initially priced in a high probability of a rate cut in March, but this has now been reconsidered. Although the market still anticipates rate cuts this year, the timing has been pushed further down the road. Deutsche Bank’s chief U.S. economist suggests that while a rate cut in March is still possible, the recent meeting has raised the bar for that outcome. The baseline expectation is now that the first rate cut will happen in June, but there are risks of an earlier reduction in May.

Policy Pivot and Market Response

The policy pivot began in December, when the committee decided to accelerate the pace of rate cuts this year. This shift reflected the sentiment that the Fed was no longer hiking rates and was ready to ease its stance. Powell’s recent remarks have signaled a slower pace than initially expected, leading to a sharp market selloff. However, markets have started to recover as investors gauge the impact of the Fed’s move and analyze its future policy intentions.

Forecasts and Predictions

Wall Street commentary suggests that the Fed will likely cut rates at least four times this year, with expectations of reductions starting in either May or June. Morgan Stanley forecasts the first cut in June, followed by more aggressive easing in subsequent meetings. Goldman Sachs predicts an initial reduction in May, followed by consecutive cuts in June, July, and September, with a final cut in December. Various factors, including inflation levels and job gains, will influence the timing and extent of the cuts.

Balance Sheet Reduction

The Fed is also considering when to alter its balance sheet reduction process. In March, the committee will discuss the timeline for allowing maturing bond proceeds to roll off. This process, known as quantitative tightening, has reduced the Fed’s holdings significantly. Economists have different predictions for when the process will halt, ranging from May to October.

Note: This article includes information and insights from ‘s .

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