**As seen in Risk In The Week report 01/26/24, subscribe at cablefxm.co.uk/reports
Back in December, the Federal Reserve left monetary policy unchanged, the federal funds rate upper bound stayed at 5.50% on a unanimous vote. The meeting came with a fresh batch of economic projections, inflation was downgraded across the horizon while the unemployment rate was seen unchanged. The Fed staff now sees the core PCE deflator rising by 2.4% in 2024 and at 2.1% in 2025, both projections were revised lower by 10bps. There has been some talk about the Fed’s inflation projections overshooting in 2023, while it is not abnormal that the staff misses on a figure, the amount of the surprise is substantial. The dot plot is now showing a total of 75bps of rate cuts in 2024, swaps have priced in from 130 to 160bps of easing since the December FOMC meeting, and the divergence between markets and the Fed has narrowed in recent sessions.
The desk at UBS said that a January hold is a done deal and sees the Fed delivering its first rate cut in March. UBS's thinking comes from their expectation of a rapid decline in core PCE inflation, they warned that if the Fed holds rates in March, the real rate could rise above the committee’s assumption of 2.2%-3.0% and that this could be seen as an intensifying level of policy restrictiveness. Strategists at Rabobank said that the focus will lie on Fed Chair Powell's presser as they will be looking at how much (or little) he is willing to push against market expectations of an early rate cut. Rabo expects the first Fed rate cut to come in June and said that this will be followed by 25bps steps per quarter.
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