The Federal Reserve is widely expected to hold interest rates steady this Wednesday at its first policy meeting of 2024. But investors will be looking for any clues about when cuts could begin.

Will it be March, May or later? Markets may not get a clear answer. But Fed followers do expect central bank chair Jay Powell to begin preparing investors for an eventual loosening, even if he doesn’t specify timing.

“This is the slow turning of the battleship of guidance where they slowly start to talk about rate cuts,” said Luke Tilley, chief economist for Wilmington Trust.

The question of whether cuts will happen in March or May is currently the subject of intense debate on Wall Street as markets hang near record heights.

Investors began 2024 with a high degree of conviction that March was the time when the central bank would begin loosening monetary policy after the most aggressive campaign to cool inflation since the 1980s. Rates are currently at a 22-year high.

But traders began recalibrating that prediction following pushback from several central bank officials who pumped the brakes on market expectations for cuts in the first quarter of 2024.

The market probabilities of a rate cut in March have dropped to roughly 46%, per the CME FedWatch Tool. That’s down from as much of a 71% chance seen more than a month ago. The odds of a cut in May are roughly 51%.

Traders are also starting to revise downward their prediction of six rate cuts in 2024, which is twice as many as the median projection provided by all Fed officials in December. The bet now is that five cuts will happen instead.

A ‘topic of discussion’

These aggressive market predictions first ramped up in December when Powell used a press conference following the Fed’s last policy meeting to note that central bank officials had started the conversation of when to dial back policy restraints, calling it a “topic of discussion” and “a topic for us looking ahead.”

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Falling inflation also encouraged these bets as key measures moved closer to the Fed’s target of 2%.

One such measure appeared last week as the Fed’s preferred inflation measure — a “core” Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December. That marked the first time the gauge was below 3% since March 2021.

What was even more encouraging is that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis it was 1.9% for the second month in a row.

Goldman Sachs chief economist Jan Hatzius forecasts that the Fed will most likely start cutting in March, citing Powell’s statement from his December 13 press conference that the committee would want to cut “well before” inflation fell to 2%.

Hatzius also expects five cuts this year, in line with current market predictions.

But Wilmer Stith, bond fund manager for Wilmington Trust, said he thinks Powell will try to walk back the number of rate cuts priced in by the market.

“He doesn’t have to walk it back that much, but he wants [expectations] to be in the center so he can have room to move in either direction without causing as much of a disruption as if he was on one side or the other,” said Stith. “That way if something happens he’s neither that dovish nor that hawkish, he can pivot and address that.”

Tilley of Wilmington Trust said he thinks the Fed will start prepping the markets for rate cuts in March and will begin actually cutting rates in June. He predicts a total of five cuts this year.

Tilley bases his June prediction partly on a similar lag between when the Fed last started talking about hiking rates and then actually doing so in March 2022.

“We have to see how the data comes in and we’ll just continue to see that slow turning of the battleship with communication and every little bit of data that comes in that supports the story and makes them more comfortable with inflation.”

Brett Ryan, senior US economist for Deutsche Bank Securities, predicts Fed officials will use this week’s meeting to signal their coming pivot by tweaking language in the official statement from the central bank’s Federal Open Market Committee.

He suggests looking at a specific passage: “In determining the extent to which any additional policy firming may be appropriate,” the statement read in December, “… the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

What he expects is that Fed officials will change “in determining the extent of any additional policy firming that may be appropriate” to “in determining future policy adjustments” — essentially removing the word “any.”

That tweak, he added, will remove the central bank’s “strong tightening bias” and leave it with “a sort of neutral bias” — thus setting the table for future cuts.

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