Jerome Powell’s probably grateful that rate-cut pricing, both for the March FOMC meeting and for the full year, has receded from recent extremes.

It’s clear the Committee would rather not cut rates in March and market pricing was nearly 80% at one juncture. There’s still around 10bps of cut premium priced for that meeting, and more than 130bps priced for the full year, more aggressive than the December dot plot to be sure.

But when you think about cut pricing for 2024, remember: That aggregate pricing reflects “a veritable constellation of prospective macro-policy permutations and the odds traders assign to them,” as I put it earlier this month. It’s not as simple as equities sometimes make it out to be.

As the familiar figure shows, stocks followed rate-cut pricing for 2024 slavishly at times during the Q4 rally, ignoring a lot of the nuance from “the probabilistic assumptions that underpin it,” as Morgan Stanley’s Mike Wilson recently wrote. It was refreshing, in a way, to see equities summit new peaks even as rate-cut wagers were trimmed mid-month (green annotation in the chart).

I’d expect Powell to downplay the chances of a March cut this week when he regales the press following the release of a refreshed policy statement. In fact, I suspect Powell will say a March cut is very unlikely, just not in so many words. “Powell’s current incentives are such that an emphasis on retaining flexibility over cutting urgency will prove the path of least resistance,” BMO’s Ian Lyngen and Ben Jeffery wrote.

The disinflation trend’s intact, and when measured on a six-month annualized basis, inflation’s back to target. The advance read on Q4 GDP found core PCE prices printing 2% for a second straight quarter. That’s all great, but with the consumption impulse still quite strong (as evidenced both by retail sales and personal spending) and the labor market still bulletproof (with all the usual caveats), policymakers have no incentive to rush into cuts. No incentive other than election-year politics, that is.

The Fed generally insists that policy settings are restrictive — “sufficiently” restrictive — but there’s more ambiguity around that assumption than the juxtaposition between 5.33% Fed funds and 2.6% headline PCE would have you believe. R-star might be higher. If it is, rate cuts may be “star crossed.” (Or r-star might be a nonsense concept, and this whole discussion might be meaningless, just like life in general, but that’s a separate discussion.)

Officials are cognizant of the risk that neutral’s higher, even if they don’t talk about it as much as they did six months ago. For now, falling inflation expectations among consumers and a still favorable trajectory for realized inflation outcomes are enough to keep the natural rate discussion on the backburner, but… well, let’s just say it’s not settled.

The Fed’s probably concerned, at the margins anyway, about the possibility that energy prices could accelerate anew given events in the Red Sea and the generally apoplectic character of the geopolitical backdrop, but that’s not going to impact the Committee’s decision calculus, certainly not in the short-term.

As ever, Powell’s press conference will be a balancing act. The Fed will doubtlessly discuss a set of possible timelines and parameters for tapering QT at the January meeting, and the financial media will press (no pun intended) Powell on those discussions. Powell’s probably just fine with talking about it. Recent Fed rhetoric, beginning with Lorie Logan on January 6, makes it abundantly clear that the Committee wants to “get this out there,” so to speak. Because one way or another, a decision has to be made as RRP balances fall away. Once the facility is drained entirely, incremental QT will begin to impact reserves and the Fed wants to be ahead of that.

Obviously, the QT taper (and eventual end) is bullish for bonds, but as BMO’s Lyngen and Jeffery remarked, “there’s a strong argument that much of the potential for slower SOMA rollovers is already priced into the US rates market.” Importantly, Powell’s QT remarks will be weighed against this week’s Treasury borrowing estimate and refunding details.

All in all, the January FOMC meeting can probably be considered a placeholder. I’d suggest it’ll be decisive for the March rate-cut debate, but even that might be an exaggeration. After all, there’s a lot of crucial data to be had between now and the March policy gathering.

Powell probably has a mind to make this as hawkish a “hold” as possible under the circumstances, but given below-target inflation using the annualized rates popular in market circles and the December dots (which I don’t think are “stale,” to use Powell’s word from the November FOMC meeting, just yet, even as the data certainly argues against the idea of below-trend growth) that’ll be a tall order.

Powell has a penchant for accidentally green-lighting market rallies and the incoming data virtually screams “Goldilocks.” Invariably (and justifiably, I should add), Powell will express an optimistic view on soft landing odds, and that has the potential to precipitate risk-taking in markets.

Coming full circle, at least market pricing is a little better balanced headed in than it was earlier this month. If equities’ recent performance in the face of less aggressive rate-cut bets is any indication, stocks would be fine if March odds were faded entirely. And it anyway may not matter in the very near-term given the potential for a bevy of top-tier macro releases and, crucially, big-tech earnings, to dictate the price action.

Oh, and someone in the media should ask Powell why the Fed didn’t anticipate that the Bank Term Funding Program would become a “free-money machine” for banks, given that the spread between the rate the Fed pays on reserves and the facility rate was guaranteed to become demonstrably positive once market pricing began to reflect future rate cuts.