• The Federal Reserve is widely anticipated to keep interest rates unchanged.
• Fed Chairman Jerome Powell could shed further details on upcoming rate cuts.
• The US Dollar could find extra legs in case of a hawkish outcome.  

The Federal Reserve (Fed) will announce the first monetary policy of 2024 on Wednesday, and market participants largely expect the Committee to leave the Fed Funds Target Range unchanged at 5.25%–5.50%. If consensus materializes, the January 31 meeting will be the fourth consecutive meeting the bank has kept its interest rates at the highest level in over two decades.

At his latest post-FOMC press conference, Federal Reserve Chair Jerome Powell refrained from giving specific guidance on the timing and pace of rate cuts. However, he emphasized that the Fed would need to implement rate cuts well in advance of annual inflation rates reaching their 2% target. Waiting until the target is achieved could have negative consequences for the economy due to the delayed impact of monetary policy. Additionally, Chair Powell expressed concerns about keeping rates too high for an extended period, as this could potentially hinder economic growth.

In light of the upcoming event, Senior Economist Tom Kenny and Economist Arindam Chakraborty at ANZ comment they continue to adhere to their recent advice that they believe a rate cut around the middle of the year would be fitting, but they must also be receptive to the idea of implementing rate reductions earlier. Monetary policy is no longer following a predetermined path, and the Fed must navigate the delicate balance of achieving sustained inflation at the target while avoiding a rapid increase in real interest rates, which could pose a risk of a sharp economic downturn.

Although there is now a debate among market participants regarding a potential interest rate cut in March or May, it appears that the decision to keep rates unchanged at the January 31 meeting appears to be a “done deal”. According to the FedWatch Tool measured by CME Group, the probability of an interest rate reduction in March surpasses 46% vs. nearly 52% of the same outcome at the May 1 gathering