By Andrew Moran
The Federal Reserve kept interest rates unchanged at the March Federal Open Market Committee (FOMC) policy meeting on March 20, but officials signaled that three rate cuts were still planned for this year.
Monetary authorities kept the benchmark Fed funds rate at a range of 5.25 percent and 5.5 percent, the highest level in 23 years.
According to the FOMC statement, economic activity remains expanding at a solid pace, the U.S. labor market remains strong, and the unemployment rate continues to be low.
Although inflation is still elevated, it has eased over the past year, the Fed said in its post-meeting statement.
Officials maintained the same language from the January meeting that it is inappropriate to lower interest rates until the Fed “has gained greater confidence that inflation is moving sustainably toward 2 percent.”
“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook.
“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals,” the FOMC statement said.
A Look at SEP
The rate-setting committee revealed the updated Summary of Economic Projections (SEP), reiterating that Fed officials still expect three rate cuts this year, effectively lowering the median policy rate to 4.6 percent.
However, the SEP data showed median policy rate expectations were adjusted higher.
In 2025, the median Fed funds rate will be 3.9 percent, up from the December projection of 3.6 percent.
The 2026 median rate will be 3.1 percent, up from the 2.9 percent estimate. The longer-run policy rate will be 2.6 percent, slightly higher than the December forecast of 2.5 percent.
“On the dot plot, there has been an upward shift in interest rate projections since December,” said Greg McBride, the chief financial analyst at Bankrate.
“There are 9 participants that see no more than two rate cuts this year, including 2 that see none, while there are 9 participants that still see 3 rate cuts by year end. Only one participant sees 4 rate cuts in 2024.”
In the broader economy, the Fed officials believe the change in real GDP will be higher than their December forecasts. This year, the economy is anticipated to grow 2.1 percent, up from the previous estimate of 1.4 percent.
On the labor front, the unemployment rate is projected to be slightly lower at 4 percent in 2024, down from 4.1 percent in the December SEP numbers.
Forecasts for the personal consumption expenditure (PCE) inflation, which is the Fed’s preferred gauge, held steady at 2.4 percent (2024), 2.2 percent (2025), and 2 percent (2026).
Core PCE, which excludes the volatile energy and food components, was revised higher for this year, from 2.4 percent to 2.6 percent.
It is then seen coming down to 2.2 percent next year and 2 percent in the following year.
Bump in the Road
Amid higher-than-expected inflation readings, Fed Chair Jerome Powell told reporters that the last two months of inflation data suggest that it was right for officials to wait to pull the trigger on a rate cut.
“We don’t really know if this is a bump on the road or something more. We’ll to have to find out,” Mr. Powell said. “Here are some bumps. Are they more than bumps?”
Mr. Powell thinks that the latest rebound in inflation could be a result of seasonal adjustments.
“We need to take time to assess if recent inflation represents more than bumps in the road,” he added.
For some market analysts, the central bank could be in the process of ignoring the 2 percent inflation target.
“The Fed is signaling to me that they may be quietly quitting their immediate goal of 2% inflation with a willingness to tolerate higher inflation,” said Christian Hoffmann, a portfolio manager at Thornburg Investment Management, in a note.
Mr. Hoffman was disappointed when the Fed chief “stumbled to specifically address the Q1 inflation print.”
A Relief Rally
Financial markets enjoyed a relief rally following the policy announcement and during Fed Chair Jerome Powell’s press conference.
“The immediate market reaction is the relief we were expecting. Investors were worrying the Fed was going to pull back from rate cuts this year, so keeping three rate cuts on the table naturally pushes stocks higher and bonds yields lower,” said Bryce Doty, the senior portfolio manager and vice president at Sit Investment Associates, in a note.
“Furthermore, it’s good to see the Fed understands it can cut rates while still being tough on inflation given that the real fed fund rate will still be considered very restrictive.”
The leading benchmark indexes were up as much as 1.23 percent, with the S&P 500 topping 5,200 for the first time.
The benchmark 10-year yield dipped below 4.28 percent. The 2-year yield fell below 4.62 percent percent, while the 30-year bond edged up to 4.45 percent.
The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, erased its gains and eased to below 103.5.
Back to the ‘80s
Heading into 2024, the futures market had been pricing in as many as six rate cuts this year, even as the FOMC signaled just three rate reductions in its SEP data.
Because of the resuscitation in inflation and solid economic growth, investors have trimmed their expectations for rate cuts to just two in 2024.
According to the CME FedWatch Tool, traders expect the initial pivot on monetary policy to happen at the June FOMC policy meeting.
The bond market has also been bracing for a higher-for-long rate environment, with the benchmark 10-year yield firmly above 4 percent.
“Jerome Powell and the Fed are unlikely to cut soon despite his comments that we were ‘close’ when he testified on Capitol Hill,” said Jay Woods, the chief global strategist at Freedom Capital Markets.
Following back-to-back hotter-than-expected consumer price index (CPI) and producer price index (PPI) prints, some economists and market analysts fear there could be a second round of inflation comparable to what occurred in the 1980s under then-Fed Chair Paul Volcker.
Richmond Fed President Tom Barkin alluded to this the ebb-and-flow in CPI readings during a recent speech, telling the audience that policymakers want to avoid a repeat this decade.
“History tells many stories of inflation head-fakes. For example, at the end of the Volcker era, inflation seemed to settle in mid-1986. The Fed reduced rates,” he said in prepared remarks before the Economic Club of New York last month.
“But inflation then escalated again the following year, causing the Fed to reverse course. I would love to avoid that roller coaster if we can.”
Looking ahead to next month’s CPI report, the Cleveland Fed’s Inflation Nowcasting model anticipates the annual inflation rate to rise to 3.4 percent.
Additionally, some of the key inflation metrics that the monetary authorities pay attention to have remained elevated, including supercore inflation, which represents services excluding housing, as it remains more than double the Fed’s 2 percent target.
