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​​​​January FOMC preview – rates to hold steady along with hints of cuts to come

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The first Fed decision of 2024 takes place this week. While no change is expected this time around, will the FOMC indicate rate cuts are on their way?

Federal ReserveSource: Bloomberg

 Written by: Chris Beauchamp | Chief Market Analyst, London | Publication date: 

First Fed decision of 2024 looms

As we approach the end of the first month of the year, the Federal Reserve's Open Market Committee (FOMC) meeting is a focal point for traders and investors alike. The anticipation of maintaining the current federal funds rate target range of 5.25-5.5% has set a tone of cautious optimism in the market.

For traders, understanding the implications of the Federal Reserve's (Fed) stance on interest rates is crucial. Interest rates are a fundamental driver of economic activity, influencing everything from consumer borrowing costs to corporate investment decisions. When interest rates are high, it can dampen economic growth as loans become more expensive, potentially leading to reduced spending by both consumers and businesses.

Rate hikes give way to cuts in 2024

In 2022 and 2023, the Fed implemented aggressive rate hikes in response to heightened inflation. This monetary tightening was aimed at cooling off an overheated economy and bringing inflation down to manageable levels. Since July, however, the Fed has held rates steady, which has been interpreted as a sign of confidence that inflation is beginning to moderate.

For traders, this period of stability offers a chance to reassess their portfolios and strategies. In particular, it provides an opportunity to look for companies that are well-positioned to benefit from stable interest rates. For example, financial institutions such as JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) might see a more predictable interest margin environment, which can help in planning their lending and investment activities.

Quantitative tightening replaces easing

Furthermore, the Fed's decision to continue allowing up to $95 billion per month of asset roll-offs from its balance sheet will have implications for liquidity in the financial system. This gradual reduction of the Fed's holdings, often referred to as quantitative tightening, can impact the availability of credit and the performance of various asset classes.

Despite the aggressive measures taken to combat inflation, recent data suggests that the U.S. economy remains resilient. Solid job growth and consumer strength indicate that a recession in 2023 now seems less likely. For traders, this resilience could translate into opportunities within the equity markets. Stocks have performed well over the past year, and sectors such as technology, represented by companies like Apple and Microsoft or consumer discretionary, where giants like Amazon lead the way, might continue to offer growth potential in a stable-rate environment.

Decision watched for clues on future policy

Investors are also closely monitoring the Fed's communications for any hints of future policy actions. The possibility of rate cuts starting in March or later in the year could signal a shift in the economic outlook and strategy. The timing of these cuts will be critical for traders, as markets typically react swiftly to any changes in monetary policy.

The Fed's forecasts for slower U.S. economic growth in 2024-2025, with higher unemployment and inflation still above target, present a mixed picture for traders. On one hand, slower growth and higher unemployment could signal caution, leading traders to seek shelter in more defensive stocks or asset classes. On the other hand, the continued strength of inflation above the Fed's target may maintain pressure on the central bank to keep interest rates higher for longer, which could benefit sectors like utilities or consumer staples, traditionally seen as less sensitive to economic downturns.

In the face of these economic projections, investors remain hopeful that the Fed can achieve a "soft landing" by bringing down inflation without severely damaging growth. This delicate balancing act by the Fed would be a best-case scenario, allowing the economy to adjust gradually to the new interest rate environment without tipping into recession.



This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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