Goldman: Upcoming Fed Meeting Unlikely To Alter 2024 Cut Pricing Range

Goldman write “despite firm activity data since December, ongoing disinflation should provide the FOMC with room for a dovish turn at this week’s meeting.”

• “At the very least we would expect the FOMC to drop its hiking bias and move to a more neutral policy stance.”
• “However, given that markets have already priced a peak to the Fed funds rate for some time, such a change is unlikely to be market moving.”
• “Guidance that falls short of an explicit easing bias could be viewed as less accommodative, potentially pushing out pricing for the first cut and simultaneously flattening the yield curve.”
• “However, we expect some March ‘cut premium’ to remain even in this scenario.”
• “Alternatively, if the FOMC switch to an easing bias, we suspect the market will more fully embrace a March cut, and pull-forward the overall path for easing, even if the Fed emphasizes a ‘gradual’ pace of easing.”
• “One reason for investors to potentially discount any Fed guidance on the pace of easing at this meeting is that many (including our economists) expect a more rapid (and greater degree of) cooling of inflation than Fed projections in December suggest.”
• “Therefore, regardless of the signaling for the March meeting, we continue to expect market pricing to remain range-bound between 125-175bp of cuts this year for now until actual easing commences, and maintain our short strangle recommendation in Dec SOFR.”