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The US Federal Reserve is widely expected to leave key interest rates steady once again on Wednesday as recent inflation and economic growth data have been higher than estimated. Instead, the focus will be on the central bankers' update on economic projections and the "dot plot" tool which will telegraph potential rate adjustments later in 2024.
According to the CME FedWatch tool, just 1% of bankers and traders expect a 25 basis points (bps) rate cut this time around. On the other hand, the current expectations for a 25 bps cut in June is over 60%.
The Fed's last Summary of Economic Projections (SEP) released in December 2023 expected the economic environment to improve and, therefore, projected a 75 bps rate cut in 2024.
Now the markets are no longer pricing in a cut in policy rates at the March meeting though expectations have shifted substantially since the end of 2023 when overnight swaps markets were pricing a 90% probability of a cut in March, said Edward Bell, senior economist at Emirates NBD, in a note.
More focus this week will likely fall on the Fed’s revised SEP their first for this year, he said.
"When they last published their economic expectations in December 2023 the Fed expected PCE inflation to cool to 2.4% from 2.8%, the unemployment rate to pick up slightly and for a substantial slowdown in growth – all consistent with a “soft landing” for the US economy. On rates, the median of the Fed’s dots plot was for 75bps of rate cuts in 2024 before rates were nudged lower over the next several years to a terminal rate of 2.5%," he added.
The GCC, where most currencies are pegged to the dollar and therefore to America's monetary policy, is likely to mirror the Fed's move on interest rates.
(Writing by Brinda Darasha; editing by Seban Scaria)
