The Federal Reserve Meets March 18 and Wall Street Has Completely Given Up on Rate Cuts

No other recurring market event is more important than the Federal Reserve's decision on the Federal funds rate. The Federal Open Market Committee meets eight times a year to decide on interest rates, and its second meeting will conclude today, March 18, with its rate decision set for 2 p.m. ET.

Investors are now almost certain that the central bank will hold the Fed funds rate steady at 3.5%-3.75%. After the Iran war broke out, oil prices spiked, which is likely to push inflation higher, making it more difficult for the Fed to cut rates as it needs to balance an inflation target of 2% with its goal of full employment.

According to the CME FedWatch forecast, which is based on futures contracts, there's a 98.9% chance that the Fed holds rates where they are. There's a 1.1% chance that the Fed raises it by 25 basis points.

Image source: Getty Images.

What to expect for the rest of the year

Looking ahead to the rest of the year, investors expect a rate cut at some point in the second half of the year, though the timing is unclear at this point. The uncertainty has only increased since the war in Iran started, as it will take time for the effect on prices to fully flow through the economy. In addition to higher oil prices, fertilizer prices are also going up as the region is key for exporting fertilizer. That could lead to higher food prices.

By the end of the year, the Fedwatch gives a 30% chance that rates will be where they are now, and a 41% year that they will be between 3.25%-3.5%. The remaining forecasts are that they will be even lower.

Three scenarios to consider

For now, the most likely scenario is that rates hold steady through the end of the year. A 25-basis-point cut isn't going to be enough to rattle markets, so in this scenario, the stock market will move on the strength of the economy, corporate earnings, and investor confidence.

Another less likely possibility is that the Fed is forced to do an emergency rate cut due to a recession. This happened during Covid and it slashed rates to zero during the great financial crisis. At this point, an emergency rate cut seems unlikely, though a recession and rising unemployment would push the Fed to be more aggressive with cutting rates. This scenario would likely be negative for investors as stocks tend to fall in a recession, though lower rates are better for stocks, all other things being equal.

Finally, the Fed could raise rates if inflation rises. This would probably be the worst scenario for investors as inflation would hamper consumer spending, hurting the economy, and higher rates would push stocks lower.

While a rate cut is unlikely today, investors will get further insights from Fed Chair Powell, that could move markets one way or another. Given the increasing number of variables after the Iran invasion, there's a lot for the Fed to consider.

The Motley Fool has a disclosure policy.