Will the Federal Reserve Boost the Stock Market With Another Rate Cut?
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Will the Federal Reserve Boost the Stock Market With Another Rate Cut?

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Will the Federal Reserve Boost the Stock Market With Another Rate Cut?

The Federal Open Market Committee, or FOMC, is set to meet on Tuesday and Wednesday, January 28 and 29, to decide whether to cut interest rates, raise them, or leave rates alone for now. While the policy-making arm of the Federal Reserve isn't expected to make any major policy changes, the meeting's outcome is far from certain at this point.

With that in mind, here's what investors can expect from the January 2020 FOMC meeting -- and what could be in store going forward.

Image source: Getty Images.

Will interest rates change?

The short answer is "probably not," but there's certainly a chance the FOMC will decide to change the federal funds rate -- although not in the direction you might expect.

Recently, most media coverage (and FOMC actions) have been focused on cutting rates. However, the FOMC has indicated that it's likely done with rate cuts for now. The projections released at the December meeting indicated that members foresee no rate changes at all in 2020.

Furthermore, the futures markets are currently pricing in an 87% probability that the FOMC leaves interest rates alone at this week's meeting, according to CME Group's FedWatch tool. And the other 13% calls for a quarter-percent increase. In other words, the markets foresee no chance of a rate cut.

In reality, the probability of a rate cut isn't exactly zero. The FOMC doesn't care what the futures markets think and will make its decision based on economic trends. But I wouldn't hold my breath for a rate cut.

In terms of market movements, a surprise rate cut would almost certainly send markets higher, while a rate hike would likely be seen as a negative catalyst.

The FOMC statement is the major item to watch

There are eight FOMC meetings each year, but it's important to realize that the committee only releases economic projections (including the closely watched dot plot) at four of them -- in March, June, September, and December. So, the January meeting is not one where we'll have a ton of projections to dissect.

Having said that, even if the FOMC holds rates steady as expected, the statement the FOMC releases explaining whatever action it takes could certainly move markets in one direction or the other. The wording of the statement is watched very closely, so any clues as to where the FOMC sees the economy or monetary policy headed in the future could be the biggest news to come out of the meeting.

It's also worth mentioning that FOMC Chair Jerome Powell will hold a press conference following the release of the statement, and the market is often quite turbulent while Powell is speaking.

What's in store for the rest of 2020?

Looking ahead, there's quite a bit of uncertainty regarding the direction of interest rates in 2020. While most people don't think the FOMC will make any changes at this meeting, investors seem to be torn going forward. In fact, here's where investors see interest rates heading by the conclusion of the December 2020 FOMC meeting:

Federal Funds Rate Target Range

Change From Current Level

% Probability

0.50%-0.75%

Four rate cuts

2.2%

0.75%-1.00%

Three rate cuts

9.7%

1.00%-1.25%

Two rate cuts

25.3%

1.25%-1.50%

One rate cut

36.2%

1.50%-1.75%

No rate movement

23.5%

1.75%-2.00%

One rate hike

2.7%

Data source: CME Group FedWatch Tool. As of 1/27/2020. A "rate cut" or "rate hike" is defined as a 25-basis-point change in the federal funds rate target range.

As you can see, although the latest projections from FOMC members don't anticipate any further rate cuts in 2020, it's fair to say that investors don't quite believe it. In fact, the market is pricing in nearly 75% probability of at least one rate cut in 2020 -- just not at the January meeting. This shows that investors might not necessarily expect a full-blown recession, but certainly a weaker economy than was initially expected for the year.

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