The Federal Open Market Committee is not expected to cut interest rates at the conclusion of their next meeting on March 19 according to fixed income markets. The key thing to watch for may be clues on the likelihood of a May interest rate cut. Currently, markets view a May cut as less likely, but possible. Statements from FOMC policymakers at the March meeting could move those expectations materially.
Slim Chance Of Interest Rate Cut On March 19
Markets currently give just a 3% chance of lower short-term interest rates at the conclusion of the FOMC’s next meeting on March 19. That’s according to the CME FedWatch Tool which measures the implicit forecasts of fixed income markets. The likely logic for holding rates steady is that, “while progress in reducing inflation has been broad based, recent readings remain somewhat above our 2 percent objective.” as Federal Reserve Chair Jerome Powell said at a speech on March 7 in Chicago. Powell also stated. “Many indicators show that the labor market is solid and broadly in balance.” If inflation is not at the FOMC’s target level and the job market remains robust, then the FOMC may not be inclined to cut rates.
However, recession probabilities have been picking up according to some indicators as tariffs and government spending cuts have added uncertainty to the economic outlook. The FOMC generally does not like to surprise fixed income markets, so it would take material economic bad news before the meeting to prompt an unexpected interest rate cut.
An Interest Rate Cut In May Is In The Balance
Although an interest rate cut in March is highly unlikely, there’s currently almost a 4 in 10 chance of a rate cut on May 7. There are two possible motivations for a cut in May. The first is that upcoming inflation reports point to cooling prices. The second is that the FOMC has concerns about the economy and want to make monetary policy less restrictive. In his March 7 speech, Powell sounded incrementally less optimistic on the U.S. economy. If those concerns are broadly shared by policymakers that could create impetus for a May rate cut. As always, much will depend on upcoming economic reports before the May meeting. That will include Consumer Price Index reports on March 12 and April 10 and Employment Situation Reports on April 4 and May 2.
What To Look For At The March Meeting
The FOMC will update their Summary of Economic Projections in March, as they do at alternate meetings. In December, policymaker forecasts called for an average of two interest rate cuts in 2025 with a few policymakers looking to deeper cuts. Currently, markets believe that three cuts may be more probable, on average. If the FOMC signal greater expectations for cuts in 2025 in their updated projections, that may make a May cut more likely.
Also, the FOMC may opt to adjust statement language in March. In January’s statement the opening paragraph read, “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.” Adjustments to that language may hint at future interest rate moves, for example if the language signals a little less confidence in economic growth and labor market robustness. The statement could also adjust its language as last stated in January that, “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.”
There are some early suggestions that Q1 GDP growth may be soft. Even if so, that may be due technical factors associated with a temporary spike in imports rather than the sort of broader economic weakness that would most concern the Fed.
Powell’s press conference after the interest rate decision on March 19 typically offers additional color on future rate moves, too. Overall, markets expect that another interest rate cut is close. The main question currently is whether it occurs in May, June or, less likely, July. The FOMC’s March meeting is unlikely to see an interest rate cut, according to markets, but the main market impact may come in helping clarify what comes next.
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