Would inflation be low enough for the Fed to cut in March?

The real Fed funds rate (Fed Funds minus inflation) is a simple metric of how tight the Fed is. Using the Fed’s preferred inflation (core PCE deflator, YoY), this is currently 1.9% (5.4% Fed – 3.5% inflation = 1.9%.) In other words, the Fed Funds rate is 1.9% higher than the inflation rate and is thus restrictive. The Fed only starts easing cycles when the Fed Funds rate is restrictive, but how restrictive?

Historically, easing cycles with inflation at or under 3.5% (like now) started with real Fed funds at an average of 2.8%. See pdf for details. If inflation behaves in the next three months as it did in the last three months (+0.2%/month), the Fed would be looking at an inflation rate of 2.9% and a real Fed Funds rate of 2.5% at their 3/20/2024 meeting (5.4% Fed – 2.9% inflation = 2.5%); a little shy of the 2.8% average, but not out of place. The possibility of a March rate cut will be driven just as much by how the real economy performs in between now and then (I think badly based on the weakness the latest Beige book showed), but a simple extrapolation of inflation fits with a real Fed Funds rate where the Fed has begun cutting cycles before.