Don’t Count on a March Rate Cut

Jan 3, 2024

Inflation will be stickier than expected, delaying the start of long-awaited interest rate cuts.

Ellen Zentner

Key Takeaways


  • Investors expecting a rate cut in March may be disappointed.
  • Six-month core consumer price inflation is likely to increase in the first quarter, prompting the Fed to watch and wait.
  • Unless there is an unexpectedly sharp economic downturn or weakening in the labor market, rate cuts are more likely to begin in June.


Investors betting that the U.S. Federal Reserve will begin trimming interest rates in the first quarter of 2024 may be in for a disappointment.


After the Fed’s December meeting, market expectations for a March rate cut jumped to surprising heights. Markets are currently putting a 75% chance, approximately, on rate cuts beginning in March. However, Morgan Stanley Research forecasts indicate that cuts are unlikely to come before June.


Central bank policymakers have likewise pushed back on investors’ expectations. As Federal Reserve Chairman Jerome Powell said in December 2023, when it comes to inflation, “No one is declaring victory. That would be premature.”1


Here’s why we still expect that rates are likely to hold steady until the middle of 2024.


Inflation Outlook

A renewed uptick in core consumer prices is likely in the first quarter, as prices for services remain elevated, led by healthcare, housing and car insurance. Additionally, in monitoring inflation, the Fed will be watching the six-month average—which means that weaker inflation numbers from summer 2023 will drop out of the comparison window. Although annual inflation rates should continue to decline, the six-month gauge could nudge higher, to 2.4% in January and 2.69% in February.


Labor markets have also proven resilient, giving Fed policymakers room to watch and wait.


Data-Driven Expectations

Data is critical to the Fed’s decisions and Morgan Stanley’s forecasts, and both could change as new information emerges. At the March policy meeting, the Fed will have only data from January and February in hand, which likely won’t provide enough information for the central bank to be ready to announce a rate cut. The Fed is likely to hold rates steady in March unless nonfarm payrolls add fewer than 50,000 jobs in February and core prices gain less than 0.2% month-over-month. However, unexpected swings in employment and consumer prices, or a marked change in financial conditions or labor force participation, could trigger a cut earlier than we anticipate.


There are scenarios in which the Fed could cut rates before June, including: a pronounced deterioration in credit conditions, signs of a sharp economic downturn, or slower-than-expected job growth coupled with weak inflation. Weaker inflation and payrolls could bolster the chances of a May rate cut especially.


When trying to assess timing, statements from Fed insiders are good indicators because they tend to communicate premeditated changes in policy well in advance. If the Fed plans to hold rates steady in March, they might emphasize patience, or talk about inflation remaining elevated. If they’re considering a cut, their language will shift, and they may begin to say that a change in policy may be appropriate “in coming meetings,” “in coming months” or even “soon.” But a long heads up is not guaranteed.

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