Fed holds rates, continues to forecast three 2024 cuts
Summary
On Wednesday, March 20, 2024, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%. While the Committee’s decision fell in line with expectations, market reaction focused on the quarterly Summary of Economic Projections. The updated Fed forecast included a dot plot that again showed a median of three 25-basis-point interest rate cuts in 2024. While some market participants expected the Fed to soften its prediction to two 2024 cuts, the median of three suggests that the Fed is seeing continued progress towards its inflation objective. That said, looking beyond 2024, Fed rate projections for 2025 and “longer term” increased, suggesting a slight bias towards rates staying higher for longer. Projected in the prior release, Fed growth projections for 2024 increased to 2.10% from 1.40%, with the FOMC characterizing the growth pace as “solid."
Impact on rates
Market reaction following the FOMC meeting was mixed, reflecting the tension between the ongoing potential for 2024 cuts alongside the possibility of rates staying higher beyond 2024. Accordingly, equity markets jumped initially — reflecting the stock market’s anticipation of rate cuts — while retracing those gains somewhat in the hours following. Meanwhile, short- and medium-term yields fell after the FOMC meeting, with rates falling five-to-seven basis points, while longer-term rates remained little changed. The market is currently underwriting a ~70% likelihood of the Fed cutting at its June meeting, with the next cut priced in for September.
Source: Fed's Summary of Economic Projections
Moving forward
As the market builds its confidence on whether the Fed can successfully achieve a soft landing, the Fed itself — evidenced by Powell’s press conference — remains focused on inflation. Core Personal Consumption Expenditures (PCE) came in at 2.85% last month, which is trending downward albeit slowly. The Fed’s projections for core PCE for year-end is 2.60%, a slight increase from its December projection. “Inflation is still too high” was Powell’s characterization of prices during the press conference, while remarking on the robustness of economic growth. Stubborn inflation, alongside strong economic growth, will continue to pose a challenging rates environment for market participants.
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