April flashlight for the FOMC blackout period – Waiting for Godot?
|Summary
We share the market's overwhelming expectation that the Federal Open Market Committee (FOMC) will leave the fed funds target rate unchanged at 5.25%-5.50% at the conclusion of its April 30-May 1 meeting.
Stubborn inflation and resilient economic activity through the first few months of the year have left the FOMC little reason to ease policy in the near term. A chorus of Fed officials, which tellingly include a number of “doves,” has indicated that there is no hurry to cut rates at this time.
An update to the Committee's economic projections will not be released at the end of next week's meeting, but the post-meeting statement and press conference will likely offer some clues on how the FOMC expects the policy path to evolve over the coming meetings.
Since the FOMC's March 20 meeting, we (along with markets) have pushed back our expectations for when the FOMC will start to ease policy. We currently expect the FOMC to first cut the fed funds target rate by 25 bps at its September 18 meeting, followed by another 25 bps point cut at its December 18 meeting.
We anticipate the FOMC to announce a change to its ongoing balance sheet runoff program at its upcoming meeting even as it leaves the fed funds rate unchanged. We expect the Committee to announce that, beginning in June, runoff of Treasury securities will be capped at $30 billion/month compared to the current runoff cap of $60 billion/month. The $35 billion monthly runoff cap for MBS, however, is likely to remain in place. The pace of MBS runoff, at $15-$20 billion per month, is already running well below the current cap.
If we are off in our timing and the FOMC does not announce a slower pace of runoff on May 1, we would expect an announcement at the subsequent meeting on June 12. We anticipate this slower pace of QT running until year-end 2024. At its trough, we look for the central bank's balance sheet to be roughly $6.9 trillion.
We do not believe slowing the pace of QT will have a material impact on the level of interest rates. The outlook for the federal funds rate will be far more critical to determining the level and shape of the yield curve in the months ahead, in our view.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.