Will the Federal Reserve cut rates? Will balance sheet normalization stop? How will the latest rate cut dot plot change? These questions not only relate to US stocks but will also directly affect the trends in the cryptocurrency market.
In recent days, US stocks and the cryptocurrency market have been fluctuating sideways, with everyone's focus on the Federal Reserve's meeting early this morning.
So what are the highlights of this interest rate meeting? Will the Federal Reserve cut rates?
I believe the possibility of a rate cut this time is very small, and it is likely that the interest rate will remain unchanged.
Why do I say this? Because recent economic data in the US has been quite strong; the labor market hasn't collapsed, and although inflation has decreased a bit, it is still around 3%, which is far from the Federal Reserve's 2% target.
In the last interest rate meeting at the end of January, the Federal Reserve clearly stated that 'there's no rush to cut rates', as the economy has not experienced a significant downturn and inflation has not been completely suppressed.
It's only been less than two months, and there haven't been any significant changes. The Federal Reserve is likely to remain on hold, waiting for more data to come in.
From the market's perspective, the CME tool shows that the probability of a 25 basis point rate cut on March 20 is less than 1%. The market generally believes that a rate cut may have to wait until May or June.
So, unless there is some shocking reversal tomorrow (like Powell suddenly turning dovish), a rate cut is basically unlikely.
Will the Federal Reserve announce the cessation of balance sheet normalization?
I think Powell is unlikely to directly announce the cessation of balance sheet normalization, but he may provide some vague expectations.
For example, saying 'we are assessing the impact of balance sheet normalization' or 'significant progress has been made on balance sheet normalization'.
This kind of statement will neither make the market nervous nor lock in future options.
If they do intend to stop, the most likely time frame would be mid-year (June or July), to wait for a few more rounds of data, especially the effects of Trump's policies.
The Federal Reserve has previously hinted that balance sheet normalization should continue until the balance sheet is reduced to around $6 trillion (20%-25% of GDP), which is considered reasonable.
Currently, it is at $6.9 trillion, which is still a bit far from the target. The market speculates that they may delay until June 2025 or even the end of the year to stop, as stopping now would be a bit early.
However, if Trump's policies (such as tax cuts or infrastructure plans) overstimulate the economy, it may prompt the Federal Reserve to adjust sooner.
If Powell slightly softens his tone tomorrow, for example, by saying 'balance sheet normalization is nearing its end', even if he doesn't explicitly say it will stop, it will still excite the market.
How will the dot plot change?
I think the new dot plot is likely to still show two rate cuts in 2025.
What is the dot plot? It is a chart where Federal Reserve officials predict future interest rates, with each point representing an official's prediction of what they think the year-end rate should be.
The last dot plot was released on December 18, 2024, when the Federal Reserve predicted two rate cuts in 2025, each by 0.25%, which would bring the final rate down to 3.75%-4%.
There may be two more rate cuts by 2026, with the year-end rate dropping to 3.25%-3.5%.
If Trump's policies (such as tariffs) lead to an increase in inflation expectations, or if economic data performs very well, some 'hawkish' officials might change their stance to only one cut, or even none, keeping the year-end rate at 4%-4.25%.
However, as it stands, the likelihood of three or more rate cuts is almost nonexistent, as there is no data to support such aggressive easing.
What impact will this have on the market?
If this dot plot shows more rate cuts than the market expects (for example, three cuts), then US stocks and the cryptocurrency market may see a surge.
If the dot plot shows that there will still be two rate cuts this year, that would be within expectations, and the market's reaction is likely to be limited, with continued fluctuations.
However, if the published dot plot shows only one rate cut this year, or even no cuts at all, that would be bearish and could lead to further declines in US stocks and the cryptocurrency market.
So overall, the Federal Reserve is unlikely to cut rates at this meeting.
Powell is likely to say, 'the economy is doing okay, inflation hasn't hit the target, and we will continue to watch the data', and will not cut rates.
The new dot plot is likely still to show two rate cuts in 2025, unless Trump's policies impact inflation, causing the Federal Reserve to become more cautious.
Key attention can be paid to how Powell views Trump's policies after the interest rate meeting, especially regarding tariffs, and how he responds to the possibility of the US economy falling into recession.
