March Madness: A Fed Meeting and Budget Games on Capitol Hill Make for an Unpredictable Week

 

There’s a wall of worry for investors and economists to climb this week.

A meeting of the Federal Reserve’s monetary policy committee tops the list of concerns, but this time around there’s no mystery about what will happen when it comes to interest rates – nothing.

There will be updates to the Fed’s forecast for the economy and rates in the months to come, and that is where the guessing game begins. Where once analysts pegged the start of rate cutting to begin at the meeting that begins Tuesday and concludes on Wednesday, the smart money is now on June as May is fast becoming a toss-up. That shift follows hotter-than-expected readings on inflation last week.

The Wednesday press conference from Fed Chairman Jerome Powell and the official statements could provide the markets with reason to pull back or go on a tear, especially after the consumer and producer price indices showed inflation remains a worry for the Fed.

“The inflation data, unfortunately, is still proving to be a little stickier than hoped, as last week’s CPI and PPI reports indicated,” said Richard de Chazal, macro analyst at William Blair. “Progress is being made, but not quite as quickly as the Fed and financial market participants would have liked. As a result, we have seen a sharp pullback in rate cut expectations.”

“Having previously expected around 150 basis points of cuts this year starting in March, the consensus seems to now be pricing in just 75 basis points with the start focused on June, but also gently edging toward September – when the discussion then starts to get more political about the Fed cutting rates just before an election,” de Chazal added.

Speaking of politics, there’s more of that raising its ugly head on Capitol Hill as yet another budget deadline looms, this one on Friday for appropriations bills that finance about 70% of the government. The threat of a government shutdown provides its own version of March Madness this week.

Reports on the state of the housing market are the main economic data due out this week, with housing starts and permit numbers for February expected to show a general uptick in activity after weather dampened things in January. The housing market is facing the combination of high mortgage rates and limited inventory of homes for sales, although there has been some improvement in that regard with the advent of spring weather. Friday will bring a report on existing home sales for February with those likely to be a little softer than January.

Chief financial officers of the major corporations are feeling better about the economy, according to a survey from Deloitte released early Monday.

“This quarter’s survey revealed a stronger outlook among surveyed CFOs for North America’s economy in particular (54% of CFOs say economic conditions will be better in a year, compared to 37% in 4Q23),” said Steve Gallucci, national managing partner for Deloitte’s U.S. CFO program.

The percentage of CFOs expressing optimism about their own firm’s outlook rose sharply, to 31% from 11% at the end of 2023.

Still, the CFOs did express worries about the geopolitical environment, domestic politics and interest rates, the survey noted.

The end of the week also will feature an update on the leading economic indicators from the Conference Board. The index fell in January, but enough of the indicators improved enough that the business organization said it no longer forecasts a recession in 2024, though it does see economic growth slowing as the year unfolds.

That has been the consensus economic outlook, although recent strength in the economy – the same forces that have enabled inflation to remain higher than the Fed would like – is delaying the expected downturn in the economy.

“Excess savings drove our view last year that the consensus recession timetable was premature,” BCA Research wrote early Monday morning in a client note. “However, we think that they will run out soon, leaving the economy exposed to the effects of the Fed’s most aggressive tightening campaign in four decades.”

“Meanwhile, other sources of cash available for spending will dry out as well,” the firm added. “Indeed, banks’ lending standards to consumers remain tight and we expect lower labor demand ahead to exert downward pressures on nominal wage growth.”

But there may well be a surprise in store that could derail that forecast or even make it come true sooner. After all, it is March Madness.