What To Expect From The Fed’s March Meeting

The Fed will announce their target for short-term interest rates again on March 22 at 2pm ET, followed by a press conference with Fed Chair Jerome Powell at 2.30 ET which will provide additional color to the Fed’s written statement. Markets expect rates to rise again, probably by 0.25-percentage-points, though markets currently estimate a 1 in 4 chance that rates rise 0.5-percentage-point. If we’re on track for a larger rise, Fed officials may hint at it in speeches over the coming weeks given how carefully expectations are managed.

Concerning Inflation Data

The attempt to tame U.S. inflation is not going as well as previously thought based on January’s inflation data. Yes, inflation is coming down, but no, it’s not getting sufficiently close to the Fed’s 2% annual goal as fast as many would like. January data implies that after the recent decline in energy costs, and despite some positive trends, core inflation remains stubbornly high. There will be further economic data to update that view before the Fed meets in March. For example the release of the Consumer Price Index on March 14, will likely be significant.

Higher Rates and Recession Risk

The expectation is that Fed may raise rates a little higher beyond the March meeting. However, there may be a limit to the maximum level the Fed can raise rates to without unwanted side effects, especially when the lagged effect of monetary policy is considered. That makes it likely that the Fed maintains high rates for a longer period in a range of 5% to 6%, rather than raising rates more dramatically. That’s because monetary policy can take 12-18 months for its full impact to be felt. That means that the Fed may have set rates to the correct level, but need to wait. If so, then raising them higher may cause unnecessary economic harm to the economy.

The Fed already views monetary policy as restrictive. For example, raising rates too high would cause interest rates on the national debt to increase substantially. Of course, that’s not the Fed’s primary concern, but they would prefer to bring down inflation without causing a recession for the U.S. economy.

Unfortunately, some believe that it may now take a U.S. recession to get prices under control. For example, in the minutes from their February meeting the Fed stated that. “With inflation remaining unacceptably high, participants expected that a period of below-trend growth in real GDP would be needed to bring aggregate demand into better balance.” Essentially the Fed is suggesting that a recession, or at least slow economic growth, might be needed to bring down inflation.

Economic Forecasts

Watch the Fed’s “Summary of Economic Projections” or “Projection Materials” with the March interest rate decision, these contain various forecasts from Fed policymakers but importantly signal where policymakers think rates will close out 2023 and beyond. In December, the median expectation was for rates to close out 2023 at 5.1%, that expectation will likely move higher with the March update, but the key question is by how much.

The Fed will most likely strike a balance between moving rates higher, and holding them at peak levels for longer. Currently, the markets expect rate increases in March, May and June. (Note that the Fed is not scheduled to set interest rates in April because the Fed typically sets interest rates eight times a year, not monthly. However, the Fed can adjust rates whenever they like if the economic news merits it, such as during extreme economic events such as during the pandemic and the financial crisis.)

We’ll learn more about the economy with February data before the Fed meets, with particular attention paid to jobs and inflation news, but current expectations are for the Fed to raise rates again on March 22, and to signal further 0.25-percentage-point rate increases are coming, as well as holding rates at peak levels for some time. The real question is how high rates will go and how long they stay there. However, over recent weeks, the market has already priced in a more hawkish outlook than was expected earlier in 2023.