No Bracket-Buster: Fed Widely Expected to Hold Key Rate Unchanged in Wake of Upticking Inflation Readings

Our chief market strategist breaks down the day's top business stories and offers insight on how they might impact your trading and investing.
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Key Takeaways

  • Fed expected to release dot-plot projections Wednesday

  • FedEx, Micron, Nike, Lululemon, and Darden all report this week

  • Nvidia in focus as firm hosts annual GTC AI conference

(Monday market open) Investors and college basketball fans have at least one thing in common: Each obsessively follows a certain committee and when said committee issues its decisions, not everyone is happy with the results.

For college basketball fans, the wait ended Sunday and the fan-favorite annual tournament gets underway this week. For investors, it’s the two-day gathering of the Federal Reserve’s policy-setting arm, the Federal Open Market Committee (FOMC), that looms as the key market event of the week.

The FOMC begins a two-day gathering tomorrow, and based on recent inflation readings, it would be madness to expect Fed leaders to do anything other than leave benchmark rates unchanged. And based on market indicators, any potential rate cuts are months away.

Last week’s hotter-than-expected inflation data reinforced ideas the Fed may take longer to cut rates. Rising Treasury yields and talk of a possible Bank of Japan (BoJ) rate hike weighed on stocks Friday, but the 10-year Treasury yield stayed near its 200-day moving average and didn’t record new highs for the year.

“Market hopes around the potential for Fed rate cuts continue to be downwardly revised,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “Right now, June looks like the first potential FOMC meeting where we may see a rate cut, but there’s no guarantee as the probabilities have been dropping over time.”

Nonetheless, the U.S. stock market appears poised to break a three-day losing streak behind strength in technology shares. Futures based on the S&P 500® index (SPX) rose about 0.7% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) rose 0.2%, and futures based on the Nasdaq-100® (NDX) were up over 1%.

That said, shorter-dated Treasury yields most susceptible to Fed rate policy made the largest gains last week. The 2-year Treasury yield rose 23 basis points, compared with 17 basis points for the 30-year Treasury bond.[HL1]  The inverted yield curve widened even further as 2-year yields opened up a bigger lead on 10-year yields. Friday’s activity extended what’s now the longest yield curve inversion ever.

While this week’s FOMC meeting isn’t expected to produce any rate changes, it may generate fodder for the market. The FOMC is expected to issue fresh economic and rate projections for the first time since December. The excitement starts Wednesday at 2 p.m. ET with the rate decision and Fed statement, followed by Fed Chairman Jerome Powell’s press conference. While no rate change is expected that day, things could possibly get volatile related to Wednesday’s release of the central bank’s latest rate projections—known as the dot-plot. 

Turning to stocks, investors are still closely watching for strength to migrate toward sectors outside of tech. As of Friday, 70% of S&P 500 stocks traded above their respective 50-day moving averages and 79% were above their 200-day moving averages. That’s down from around 90% back in December. But below the surface, sector rotation has been occurring. Materials and energy are among the beneficiaries of this rotation (see more below). The rally does appear to be broadening out and new market leaders and new sector leaders could emerge.

Morning rush

  • The 10-year U.S. Treasury yield (TNX) was up almost two basis points at 4.32%.
  • The U.S. Dollar Index ($DXY) was little changed at 103.456.
  • The CBOE Volatility Index® (VIX) was up 0.11 at 14.52.
  • WTI Crude Oil (/CL) was up $0.24 at $80.82.
  • Bitcoin (/BTC) was little changed around $68,391.

 View from the floorGet up to date on important technical levels, market momentum, the volatility picture and key stocks to watch each Monday with Schwab’s Weekly Trader’s Outlook.

 What to watch


Week ahead: This week is packed with corporate earnings results that might have a market impact. That’s especially the case Thursday with FedEx (FDX), which is sometimes seen as an economic barometer. Other major companies expected to report include semiconductor firm Micron (MU) on Wednesday and Nike (NKE), lululemon (LULU), and Darden Restaurants (DRI) on Thursday.

Nvidia (NVDA) will also be in focus as the firm hosts its annual GTC AI conference beginning today with a keynote speech from NVDA founder and CEO Jensen Huang. His address is expected to begin around 4 p.m. ET. Huang, whose company’s shares have gained 77% so far this year, also hosts an AI panel discussion Wednesday morning.

“From a bullish perspective, we worked off a lot of the froth in the semiconductor space last week,” Schwab’s Peterson said, adding that NVDA’s event could “reignite bullish interest.”

On the other hand, he said, “yields are on the rise and investor optimism over rate cuts is diminishing.” Growth stocks in tech and other sectors can be more vulnerable to rising yields.

FOMC on horizon: Wednesday brings the rate decision and a fresh batch of economic and rate projections, with anticipation building after recent mixed economic numbers. As mentioned above, analysts see no chance of a rate cut, so eyes will be on the Fed’s first dot-plot since December, when policymakers expected three rate cuts in 2024. However, inflation hasn’t come down as quickly as the Fed might have hoped.

Questions and answers to watch for:

  • What’s the outlook for the economy? Does the Fed think they can or have achieved a soft landing
  • Is the Fed still anticipating cutting three times this year?
  • Will the Fed start to slow the pace of balance sheet roll off?
  • What’s are the Fed’s updated economic projections?

Powell’s post-meeting press conference will likely include his first public thoughts on the recent Consumer Price Index (CPI) and Producer Price Index (PPI) reports, as well as the February Nonfarm Payrolls data. Both CPI and PPI came in higher than expected. Rising housing costs kept CPI elevated, while both CPI and PPI growth reflected higher energy prices.

However, the inflation report the Fed watches closest is Personal Consumption Expenditure (PCE) prices, which has a smaller shelter component and is scheduled for release March 29.

Also monitor the FOMC meeting for any updates on the timing of Fed plans to slow the pace of its balance sheet roll off.

Reuters reports that the BoJ has begun making arrangements to end its negative interest rate policy at the conclusion of its Tuesday meeting, meaning a decision could come as soon as tonight in the U.S. Recent wage hike data from several major firms provided more evidence of a reviving economy.

Japan hasn’t hiked rates in 17 years, Reuters said, and an increase could be seen as bearish for U.S. Treasuries if higher Japanese yields attract money from Treasury markets abroad. One possible reason U.S. Treasury yields rose toward the end of last week might have been anticipation ahead of the BoJ meeting.

Preliminary March University of Michigan Consumer Sentiment last Friday came in a bit below expectations at 76.5, hardly changed from February’s 76.9 but the lowest since December. Analysts expected a headline of 77.3, but rising gas prices apparently kept optimism in check.

Stocks in spotlight

Stocks on the move early Monday include: Nvidia shares gained more than 2% in the premarket ahead of the company’s GTC Conference. Alphabet (GOOGL) surged 4% following a Bloomberg News report that Apple (AAPL) was in talks with Google to include the company’s Gemini AI in iPhones. Meanwhile, another chipmaker, Super Micro Computer (SMCI), firmed ahead of the company’s first trading day as part of the S&P 500.

Friday in review:

The SPX and the Nasdaq Composite® ($COMP) sank for a third straight day Friday and posted their second-straight weekly declines, as technology shares remained under pressure and stronger-than-expected inflation readings dampened hopes for Fed interest rate cuts. The small cap-focused Russell 2000® Index (RUT) bounced Friday but still ended the week with a loss, breaking a two-week winning streak. Energy companies extended a recent rally behind climbing crude oil prices.

Eye on the Fed

Early today, futures trading pegged chances at 99% of the FOMC leaving rates unchanged at the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in a 95% chance the funds rate will remain unchanged after the Fed’s May meeting. Chances for a quarter-point rate cut in June are about 56%.

CHART OF THE DAY: RANGEBOUND BLUES FOR BONDS. Last week’s rebound in the U.S. 10-year Treasury note yield (TNX—candlesticks) helped pressure stocks and may have been influenced by worse-than-expected U.S. inflation and rising odds of a BoJ rate hike. Still, you could argue the yield rally just carried TNX back toward the 20-day moving average (blue line) that it’s been hovering around most of the year. It’s also still just above the 200-day moving average (red line). Deviations from those trend lines, both up and down, have usually reverted to the mean so far in 2024. Data source: Cboe. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Don’t just do something, stand there: Since this is Fed week, it’s worth asking whether there’s any chance of the FOMC going all year without lowering rates. We’ll get a close look at FOMC’s latest dot-plot to learn if any FOMC hawks want to completely hide the punch bowl. For now, the market builds in almost no chance of that, little surprise considering the last dot-plot showed three rate cuts likely in 2024. Chances of rates remaining all year where they’ve been since last July between 5.25% and 5.5% were less than 2% as of late last week, according to the CME FedWatch Tool. But there is some movement around the edges. The tool built in about a 9% chance of just one cut, up from 2% a month ago. Chances of two rate cuts stood at 25%, up from 9% a month ago. The highest odds are for three rate cuts, taking the range to 4.5% to 4.75% by December. While inflation could play a big role in how this turns out so could jobs. A rising unemployment rate and higher jobless claims, if they arrive, might give the Fed more confidence the economy has slowed enough to make an adjustment.

Time, task, and materials: The S&P 500 Materials Index ($SP500#15) posted a record high last week. Schwab’s monthly Sector View late last month put materials in the “outperform” category, and it’s been doing just that. However, materials have the second-lowest SPX weighting of all sectors, coming in only above utilities, so their strength hasn’t really moved the market’s needle. Still, a weaker U.S. dollar and hopes for Fed rate cuts continue to provide traction for these companies, which sell a heavy percentage of their products abroad.

Refining crackles: The refining subsector of energy has also been sizzling, led by Marathon (MPC), Chevron (CVX), and Valero (VLO). The rally gained steam as crude oil prices touched $80 per barrel recently for the first time since last fall and as U.S. oil and gasoline demand appeared to turn higher. The $80 oil price is great for upstream oil companies, and rising gas prices help refiners, but it could give the Fed more of an inflation headache. Part of the 0.6% February rise in PPI reflected firmer energy costs. However, high prices are a matter of perspective. Crude remains well below typical levels from 2010–2014 even without factoring for inflation.


March 19: February Housing Starts and Building Permits.

March 20: FOMC rate decision and projections and expected earnings from Micron (MU) and General Mills (GIS).

March 21: February Existing Home Sales, February Leading Economic Indicators, and expected earnings from FedEx (FDX), Nike (NKE), lululemon (LULU), and Darden Restaurants (DRI).

March 22: No major earnings or data expected.

March 25: February New Home Sales.


Key Takeaways

  • Fed expected to release dot-plot projections Wednesday

  • FedEx, Micron, Nike, Lululemon, and Darden all report this week

  • Nvidia in focus as firm hosts annual GTC AI conference

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