EconoFACTS

March 20, 2024 | 15:18

FOMC Policy Announcement and SEP — Rate Cuts Coming, But Maybe Not Soon

Economist

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

The Fed kept policy rates unchanged for the fifth consecutive meeting, as completely expected, with the target range for the fed funds rate at 5.25%-to-5.50%. Overall, the policy statement was identical to the previous one except the mention of job growth as having “moderated” was removed; it’s now just “strong”. Importantly (and as anticipated), the forward guidance (changed at the last meeting) was repeated. Recall: “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.” In the presser Chair Powell said the inflation data for January and, so far, for February, didn't “boost” confidence.

In the Summary of Economic Projections (SEP) and the ‘dot plot’, the median projection for the fed funds target range midpoint remains at 4.625% for end-2024, implying 75 bps of easing as before. Next year’s total easing was reduced to 75 bps from 100 bps with the higher ending level cascading into 2026 (with 75 bps worth of cuts as before). Interestingly, the longer-run median forecast was lifted a little (by a scant 6.3 bps) to sit in between 2.50% and 2.625%.

Elsewhere in the SEP, the median projection for real GDP growth was raised across the board, to 2.1% this year (+0.7 ppts), 2.0% next year (+0.2 ppts) and 2.0% in 2026 (+0.1 ppts), as the economy continues to brandish resiliency. This is a flush of above-potential (1.8%) paces. Despite the stronger growth and slightly lower jobless rate (by a 1/10 in 2024 and 2026 to 4.0%), inflation still hits 2.0% by 2026 Q4. But it’s getting there a little more stubbornly. For this year and next, PCE inflation is 2.4% and 2.2% (+0.1 ppts) and core inflation is 2.6% (+0.2 ppts) and 2.2%.

Also in the presser, Powell said it would be appropriate to taper quantitative tightening “fairly soon”, suggesting this may occur before rate cuts commence.

Bottom Line: Economic resiliency and inflation stubbornness are chipping away at the Fed's appetite for easing, but not enough to derail rate cuts later this year. However, timing is still very much in the air.