To no-one’s surprise, the Federal Open Market Committee (FOMC) chose to keep the benchmark policy rate at 5.25%-5.50% today. More significantly, the latest dot plot revealed the committee continues to expect 75 basis points of cuts this year. That is despite recent upside inflation surprises as well as upward revisions to both its GDP growth and inflation forecasts. This is a Fed that wants to reduce interest rates.

The Fed did not make any announcements with regards the balance sheet, but noted that they will likely begin to slow quantitative tightening fairly soon.

Recent upside surprises

The past few months have been a particularly volatile period for Fed forecasts. As recently as early February, financial markets were convinced that the Fed would cut policy rates at least six times this year. Yet the hot January and February inflation and jobs reports prompted markets to significantly revise their expectations, bringing them in line with our own forecast for three cuts this year, starting in June.

In the last week, there has been growing speculation that the latest inflation prints represented a setback to the Fed’s efforts to reach the 2% inflation target and, as such, the Fed’s dot plot may see one cut removed this year.

In fact, the Fed maintained its median forecast for three cuts this year, suggesting that the Fed believes the recent inflation prints may have potentially been distorted by seasonal effects and, as a result, the broader picture of disinflation has not changed.

Updates to the Summary of Economic Projections

The new dot plot and Summary of Economic Projections (SEP) indicated that inflation has proven to be slightly stronger than the Fed had anticipated, but economic growth and the labor market are stronger—essentially, a soft landing.

  • The 2024 GDP growth forecast was revised significantly higher, from 1.4% to 2.1%. Growth for 2025 and 2026 were also both revised higher to 2%. This implies they expect growth to remain above potential (estimated at 1.8%) for the entire forecast period.
  • The core PCE inflation forecast for 2024 was revised up from 2.4% to 2.6%, moving further away from the 2% target. While this was at least partially a reflection of the higher-than-expected inflation prints for January and February, the implication is that they do not need to see inflation dropping to 2.5% before they cut rates. Forecasts for 2025 and 2026 were left unchanged at 2.2% and 2.0%, respectively.
  • The SEP sees unemployment rising to just 4.0% this year, and 4.1% next year.

Despite the picture of stronger growth and higher inflation, the new dot plot was only slightly adjusted:

  • The median projection still sees rates falling to 4.6% by the end of this year. This equates to 75 basis points of cuts in 2024, unchanged from December.
  • Of the 19 participants, 18 see three or fewer cuts this year. Only one sees four cuts. Two participants expect no cuts.
  • The median dot falls further to 3.9% by end-2025, equivalent to another 75 basis points of cuts. By contrast, the December 2023 dot plot projected 100 basis points of cuts in 2025.
  • The median dot then falls to 3.2% in 2026, equivalent to yet another 75 basis points of cuts. This implies that between 2024-2026 the committee anticipants 225 basis points of easing.
  • As was much anticipated, the median longer run dot was increased slightly, from 2.5% to 2.6%— a (slightly) higher-for-longer outcome.

FOMC dot projections
March 2024

Individual FOMC member median dot projections from March 2024
Source: Federal Reserve, Clearnomics, Principal Asset Management. Data as of March 20, 2024.

Looking ahead

Powell downplayed the importance of the recent inflation prints, instead referring to the expected inflation path as “bumpy.” He did, however, acknowledge that the prints have not helped their disinflation confidence and noted that they will need to gain more evidence and confidence that inflation is trending back toward target.

Even so, the FOMC’s expectation that inflation will only fall to 2.6% this year, and that being a sufficient condition to start easing monetary policy, will raise questions about their commitment to the 2% inflation target. Furthermore, cutting rates at a time when the economy is running above trend and while unemployment is still near record lows surely raises the risk of another inflation wave.

The overall picture, however, was of a Fed that really wants to cut rates, would need a good reason not to cut rates, and is quite confident in its expectations for a soft landing. Markets couldn’t really have hoped for a more market friendly Fed decision.

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