The Federal Open Market Committee will meet for the first time in 2024 this week to decide on the direction of the Federal Reserve's policy and messaging.
At its December meeting, Fed Chair Jerome Powell said the central bank could institute up to three 25-basis-point cuts this year. But according to the CME's FedWatch Tool, investors are placing the highest odds on six cuts by year-end. On timing, the March FOMC meeting was seen as the most likely time for the first cut to come, but with strong fourth-quarter GDP and the labor market still intact, investors increasingly believe that it will instead come in May.
Ahead of the meeting and Powell's press conference on Wednesday, Business Insider asked former Fed economist Claudia Sahm what to watch for to gain insight into what the central bank will do in the months ahead. Sahm is well-known for developing an indicator that identifies a recession in real time, instead of waiting for the National Bureau of Economic Research's official designation, which often comes months later. The indicator says that once the unemployment rate's three-month moving average rises by 0.5%, a recession has begun.
The first thing Sahm said to look out for is whether or not Powell makes clear that they will not cut rates at the March meeting. If it sounds like he is explicitly leaving the door open for a cut, that's probably what the central bank will do, she said. In other words, the Fed will communicate indirectly what it will do in a couple months' time.
"He doesn't want to surprise anyone," Sahm told Business Insider on Monday. "Unless something very unusual and disruptive happens in the economy or financial markets, they are not going to cut unless they've given us a very strong signal that they're getting ready to cut."
Second, Sahm said to monitor Powell's body language and tone of voice. If he seems upbeat, it could indicate that the Fed is going to take a more dovish stance and cut rates on the earlier side. In December, when Powell announced the Fed would cut in 2024, he seemed more cheerful and confident, she said.
"How amped up does he sound?'" Sahm said. "I refer to the December press conference as like, 'Pop the champagne.' I mean it still sounded like a boring press conference that would put you to sleep. But markets clearly heard it the way I did."
Stocks have since hit fresh record highs multiple times already in 2024.
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Sahm counts herself in the dovish camp that believes the Fed should start cutting rates sooner rather than later. She believes the neutral rate of interest — the point at which policy is neither restrictive nor accommodative — is 100 basis points below current levels. With core PCE now under 3%, she said inflation data now supports lowering rates.
While Sahm does not currently see a recession unfolding in the months ahead, she said the longer the Fed leaves rates elevated, the higher the chance of a downturn. This would likely manifest via trouble in financial markets that then affects the real economy.
"The Fed works first through markets. They're taking some big risks in that they're talking about the real economy being resilient, and yet I don't think that's where — if the Fed causes a problem they're not doing it in the real economy first," she said.
"When you have a big problem in financial markets, it has a tendency to end up being a big problem in the economy," she continued. "They need to get going."
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