The Fed’s Rate Message Makes the Sidelines Risky

The Fed poured cold water on a March rate cut, but the underlying message still has rates coming down—by a lot. Waiting for the starting point can be risky for investors.

At its January 31 meeting, the Federal Reserve didn’t change its target interest-rate range of 5.25%–5.50%. Chair Jay Powell also signaled that a March rate cut is unlikely. That result may not sit well with investors looking for an early start to the cycle. Should they be disappointed? Is the signal that a March rate cut won’t happen a good reason to stay on the sidelines?

We don’t think so.

As we see it, the Fed’s underlying message bolsters our view that the sidelines could be a risky place for investors waiting to get into the game. To understand the Fed’s thinking, we need to know what it’s aiming for: an equilibrium in the economy that leaves it most resilient against inevitable shocks.

Tale of the Tape: Reality Versus Forecasts

The Fed’s quarterly summary of economic projections describes its view of equilibrium in terms of “long-term” forecasts. It spans three dimensions—growth, labor and inflation—and includes a forecast of the policy rate necessary to keep the economy in balance. To get a sense of where we stand versus the Fed’s target, we can compare these forecasts to the actual data over the past few months (Display).

Where Does the US Economy Stand Versus the Fed’s Equilibrium