What To Expect From The Fed’s February Meeting

The U.S. Federal Reserve (Fed) is all but certain to raise rates 0.25 percentage-points when it announces interest rates on at 2pm ET on Wednesday, February 1, according to interest rate futures. Following that, the March 22, meeting should be a similar story, where the Fed is likely to once again raise rates 0.25 percentage-points, though there’s some chance the Fed holds rates steady.

If these forecasts are accurate, it means that the main informational value from the Fed’s next meeting will be insight into the Fed’s plans for interest rates for the meetings of May, June and beyond.

Here the market anticipates that the Fed will hold rates steady, or even begin to cut them later in 2023. Still, many Fed policymakers continue to comment that rates are likely to rise over to over 5%. That’s in contrast to what the market is expecting.

Rates over 5%

On January 19, 2023 Susan Collins of the Boston Fed said that she sees rates “just above” 5%. James Bullard of the St Louis Fed has made similar comments recently, and this is also consistent with the Fed’s projections from December 2022 when the majority of policymakers saw rates exceeding 5% in 2023.

This puts the market’s focus on the Fed’s May meeting. If the Fed is going to move rates over 5%, this is likely the meeting when it would happen given their expected usage of 0.25% rate increments for upcoming meetings.

The Fed manages expectations for interest rates tightly as meetings near. This suggests that we are unlikely to see a surprise for the Fed’s February meeting, or even March. In contrast, the May meeting is far enough away to offer some flexibility. If the Fed is pushing for rates over 5% as recent statements signal, then the Fed will want to underline this with the announcement of the February decision and Jerome Powell’s accompanying press conference. Equally, if the Fed decides to back away from rates exceeding 5% in 2023, they have time to do that too.

The Gap Between Markets And The Fed

Still the Fed and markets are not too far apart. Various Fed policymakers have commented that rates should peak at 5% to 5.25%, whereas markets see peak rates at 4.75% to 5%. That’s a gap of 0.25% in interest rate expectations currently. It’s possible incoming data alter the Fed’s plans, such as more encouraging inflation numbers.

Expect the Fed to increase rates 0.25 percentage-points on February 1, and more than likely on March 22 too. However, it’s the discussion of plans for the May 4 meeting that have the greatest potential to move markets. The Fed holding rates below 5% might confirm recent bullish trends in markets, but if the Fed does decide to continue to raise rates in May, that would be a little more bearish. Still, current consensus is that we’re just a few months away from peak interest rates for this cycle and the debate is mostly finessing peak rates to within 0.25 percentage-points.