The two big takeaways from the FOMC statement and Powell’s press conference were:
- The Fed will only cut rates when “it has gained greater confidence” that inflation will get to the 2% target
- Powell says that “it is likely we don’t have enough confidence to cut in March”
The odds of a March rate cut were sitting around ~62% going into FOMC meeting itself. Right now, that has been cut all the way down to ~35%. Meanwhile, the total reduction in rates for the year is seen at around ~140 bps at the moment.
So, what’s next for markets?
The Fed has already laid out their supposed ‘base case’ scenario for the months ahead. And that means all else being equal, a rate cut in March should be off the table. Thus, it is up to the data now to really support that argument or subtract from it.
And that will be what traders have to look out for in the weeks ahead, all before we get to the March FOMC meeting. Do keep in mind that while the meeting decision is on 20 March, the Fed blackout period will begin on 9 March.
For trading this week, the US jobs report tomorrow will be the next big data for traders to look at. That will be the first step in determining the strength of Powell’s guidance yesterday. Remember, this is a market that is desperate for anything to vindicate their view on rate cuts. So, that will be something to be mindful about when it comes to the reaction to the labour market data tomorrow.