The heavyweight Federal Reserve interest rate decision is coming! Maintaining the status quo is the consensus, and the market is closely watching for any guidance on interest rate cuts.

Zhitong App has learned that the Federal Reserve will officially hold its first FOMC (Federal Open Market Committee) interest rate meeting of 2024 this week. Goldman Sachs, a major Wall Street bank, predicts that the Federal Reserve will "stay put" and expects the first rate cut after the 2022 rate hike cycle to occur in March. The Federal Reserve will announce its rate decision statement on Thursday morning Beijing time (3 a.m. on February 1), followed by a speech by Federal Reserve Chairman Powell on the latest monetary policy.

Traders in the interest rate futures market unanimously believe that the Federal Reserve FOMC will keep the federal funds rate unchanged at 5.25-5.50%. This makes Chairman Jerome Powell's remarks at the press conference and whether he chooses to send any signals related to rate cuts or not extremely important.

Therefore, any wording related to "rate cuts" in Chairman Powell's speech, whether it shows a hawkish or dovish tone, is the core focus of global investors. All of this depends on how Powell and his colleagues at the Federal Reserve interpret the large amount of economic data recently released.

Goldman Sachs has been predicting March as the most likely time for a rate cut for some time, and still predicts March as the first rate cut after the Federal Reserve's rate hike cycle. "We continue to expect...a total of 5 rate cuts in 2024, with the first rate cut in March," Goldman Sachs said in a report. Goldman Sachs cited two main reasons to support their view: progress on inflation has exceeded the inflation threshold set by the FOMC - Goldman Sachs said the Federal Reserve does not wait for the inflation rate to reach the 2% anchor target before cutting rates, they usually cut rates as inflation data gradually approaches 2%; in addition, the relatively weak labor market in recent times provides additional reasons for the "FOMC to cut rates early".

Bloomberg Economics economists Stuart Paul and Estelle Ou agree with Goldman Sachs' view, stating, "The stage for the Federal Reserve to take rate-cutting measures in the coming months is basically set. We expect the Federal Reserve to start lowering the federal funds rate target range in March, trying to achieve the soft landing they expect."

After the release of strong GDP data, market expectations for rate cuts have been pushed back from March to May

Contrary to Goldman Sachs' rate cut expectations, after the release of strong US GDP data and core CPE data falling to 2.9% last week, the market unanimously believes that the first rate cut will take place in the second quarter, although a rate cut at the end of the first quarter also received strong support. After this week, the Federal Reserve FOMC will hold its interest rate meeting for this year again on March 19th to 20th Eastern Time.On the one hand, inflation data continues to unexpectedly decline. The PCE inflation data released on Friday showed that in December, the preferred inflation measure of the Federal Reserve, the core PCE, which excludes volatile food and energy components, unexpectedly dropped to 2.9%, breaking below the important threshold of 3% for the first time since the beginning of 2021. The inflation report released on Friday indicates that the pace of inflation decline in the United States in 2023 is much faster than the general expectations of the Federal Reserve and Wall Street economists. At the same time, the relatively strong job market in the United States continues to drive consumer spending.

On the other hand, US consumer spending remains unexpectedly strong. There is no doubt that the decline in inflation has greatly boosted consumer spending. Driven by strong consumer spending, the annualized quarterly GDP growth rate in the fourth quarter of the United States reached 3.3%, exceeding the general expectation of economists of 2%. In the whole year of 2023, the US economy grew by 2.5%, surpassing the GDP growth rate of 1.9% achieved in 2022. However, the strong trend of consumer spending may still worry some Federal Reserve officials about the possibility of price pressures and a potential rise in US prices.

After the release of the latest inflation data, the CME "Fed Watch Tool" shows that interest rate futures traders continue to believe that the possibility of the Federal Reserve's first rate cut in May is the highest, rather than the widely expected rate cut in March before the release of the unexpectedly strong US GDP data on Thursday.

The longer the high interest rate policy is maintained in the United States, the inevitably higher borrowing costs will hurt consumer demand and companies' hiring and expansion plans, which is something the Federal Reserve, which is concerned about the prospect of a "soft landing," does not want to see. Therefore, in the eyes of most economists, although the decline in inflation in 2024 may slow down, the overall trend is downward. It is expected that the overall PCE inflation rate data will drop to around 2%, the target anchored by the Federal Reserve. In 2024, the Federal Reserve will cut interest rates by at least 75 basis points, as hinted by the December FOMC dot plot, to fuel US economic growth, especially consumer spending.

Nomura Securities predicts in its latest report that the Federal Reserve will cut interest rates by a total of 100 basis points in May, July, September, and December 2024.Economist Lydia Boussour from Ernst & Young also stated that Federal Reserve policymakers "are not in a hurry to cut interest rates in the short term and will proceed cautiously." She predicts that the Fed will cut rates by 25 basis points at each FOMC meeting in May, June, September, and December this year.

A survey conducted by an institution from January 16th to 23rd among economists worldwide showed that all 123 economists interviewed predicted that the federal funds rate would remain between 5.25% and 5.50% at the Federal Open Market Committee (FOMC) meeting on January 31st. Among them, the majority of the 86 respondents predicted that rate cuts would begin in the next quarter, rather than in March. Approximately 45% of economists (55 individuals) predicted rate cuts to start in June, 31 predicted May, and only 16 believed there would be a rate cut in March. The rest predicted rate cuts to begin in the second half of the year based on continued inflation decline.

The survey also indicated that economists' predictions are more aligned with the Federal Reserve's own "dot plot" forecast rather than market expectations. About 60% of economists (72 out of 123) expect rate cuts this year to be less than 100 basis points, which is lower than the market's previously aggressive prediction of over 150 basis points.