U.S. FOMC Meeting (March 19-20, 2024)

Fed holds rates, signals slower rate cutting path 

• The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 5.25% to 5.50% range and announced it would continue its balance sheet runoff. 
• The Fed adjusted its language to acknowledge the recent strengthening in economic data, stating "recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low."
• With inflation having proved more persistent recently, the statement still says that while inflation "has eased over the past year", it "remains elevated."
• On the future path of policy, the statement repeated that "the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
• The Fed's Summary of Economic Projections was updated from December:
  • The median projection for real GDP growth was upgraded to 2.1% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% over the long run (from 1.4%, 1.8%, 1.9%, and 1.8%). 
  • The median unemployment rate forecast was adjusted slightly to 4.0% in 2024, 4.1% in 2025, 4.0% in 2026, and 4.1% over the long run (from 4.1%, 4.1%, 4.1%, and 4.1%), respectively.
  • On inflation, the median estimate for core PCE was assumed to be 2.6% in 2024, 2.2% in 2025, and 2.0% in 2026 (from 2.4%, 2.2%, and 2.0%).
  • The median projection for the fed funds rate was 4.6% in 2024, 3.9% in 2025, 3.1% in 2026, and the long-run neutral rate was assumed to be 2.6% (from 4.6%, 3.6%, 2.9%, and 2.5%).
• All of the members of the FOMC voted in favor of the decision.

Key Implications

• We were all looking to see how the Fed's outlook for rate cuts would shift in the wake of the recent uptick in inflation and subsequent hawkish rhetoric from various FOMC members. While the median Fed dot is still calling for 75 basis point in cuts for 2024, the range of estimates moved higher. Importantly, the Fed is expecting a slower path of rate cuts in 2025 and the long-term neutral rate estimate nudged higher. This decision may not be as hawkish as some might have expected, but it is consistent with the upgrade to economic growth and the expectation that inflation is more likely to remain elevated over the coming year. 
• Today's report does little to change the expectation for the start of rate cuts. Rather it focuses on the speed of rate cuts. We have been arguing for some time that the strength of the American economy has granted the Fed optionality to be patient as inflation moves towards the 2% target. This is important because the path of inflation will not be a straight line. Recent CPI/PCE readings have made this blatantly clear. Over the last few months, these hotter inflation readings caused market pricing to push the timing of the first rate cut from today(!) all the way to the June/July time period. While we agree with this timing, it will require the economy to show some signs of slowing and for inflation to re-establish is downward march to 2%.     

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