The Federal Reserve kept interest rates steady on Wednesday as expected and signaled that it continues to plan multiple rate cuts through the end of the year.
After its two-day policy meeting, the central bank’s Federal Open Market Committee, which sets interest rates, said it would keep its benchmark overnight interest rate in a range between 5.25% and 5.5%, where it has been held since July 2023.
Along with the decision, Fed officials announced cuts of three-quarter percentage points through the end of 2024, which would be the first cuts since the early days of the Covid pandemic in March 2020.
The current key interest rate is the highest in more than 23 years. The interest rate determines what banks charge each other for overnight loans, but it affects many forms of consumer debt.
The outlook for three cuts emerged from the Fed’s “dot plot,” a closely watched matrix of anonymous forecasts from the 19 officials who make up the FOMC. The chart gives no indication of the timing of the movements.
Chairman Jerome Powell said the Fed also didn’t comment further on timing, but he still expects the cuts to come as long as the data cooperates. Futures markets following the session priced in a nearly 75% chance that the first cut would occur at the June 11-12 session, according to CME Group’s FedWatch gauge.
“We believe that our policy rate is likely at its peak for such a cycle and that if the economy performs broadly as expected, it will likely be appropriate to begin unwinding policy restraint at some point this year.” Powell said at his press conference after the meeting. “We are prepared to maintain the current target range for the federal funds rate for longer if necessary.”
The chart showed three cuts in 2025 – one fewer than when the grid was last updated in December. The committee expects three more cuts in 2026 and two more in the future until the key rate settles at around 2.6%, close to what policymakers estimate as a “neutral rate” that is neither stimulative is still restrictive.
The grid is part of the Fed’s summary of economic forecasts, which also includes estimates of gross domestic product, inflation and unemployment. The Dot range was slightly more restrictive in terms of deviations from the median compared to December, but not enough to change this year’s forecasts.
After the release of the FOMC decision, markets rallied. The Dow Jones Industrial Average ended the session up 401 points, or just over 1%. Treasury yields mostly fell, with the benchmark 10-year bond last at 4.28%, down 0.01 percentage point.
“The conclusion of this no-news-is-good-news press conference shows that markets continue to have the green light to rise,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “We are not surprised that investors’ initial reaction is to push up stock prices and expect this to continue until a new shock hits the system, because this Fed will not be in the bull market Stand away.”
Increases GDP forecast
Officials have sharply accelerated their forecasts for GDP growth this year and now expect the economy to grow 2.1% on an annual basis, compared with the 1.4% estimate in December. The projected unemployment rate fell slightly to 4% from the previous estimate, while the forecast for core inflation, as measured by personal consumption expenditures, rose to 2.6%, up 0.2 percentage points from the previous estimate but slightly below the most recent value is 2.8%. The unemployment rate was 3.9% in February.
The GDP outlook also gradually increased over the next two years. Core PCE inflation is expected to return to its target by 2026, just as it did in December.
The Federal Open Market Committee’s (FOMC) statement after the meeting was almost identical to the one it issued at its last meeting in January, except for an upgrade of its assessment of employment growth to “strong” from January’s description that the gains ” “weakened”. The decision to leave the tariffs unchanged was approved unanimously.
Markets had been watching closely for clues as to which direction the Fed would take its monetary policy in the future.
Earlier this year, traders in the Fed funds futures market had heavily priced in the likelihood that the central bank would begin cutting interest rates at this week’s meeting and continue cutting rates until it reached a total of seven cuts by year’s end. However, recent developments have dramatically changed this view.
Better-than-expected inflation data at the start of 2024 sparked caution among top Fed officials, and January’s FOMC meeting ended with the central bank saying it needed more evidence that prices were slowing before making “bigger moves.” Gain “confidence” in inflation and start reducing it.
Statements from Powell and other policymakers since then reinforced sentiments of a patient, data-driven approach, and markets were forced to reassess. Powell and his cohorts have indicated that they can take a more measured approach to monetary easing because the economy is still growing at a healthy pace and unemployment is below 4%.
“The economy is strong, inflation is down significantly,” Powell said, “and that gives us the opportunity to approach this question cautiously and be more confident that if we take this step and with the “Start reducing our restrictive policies.”
At this week’s meeting, the first rate cut is expected to come in June and be followed by two more, bringing markets and Fed officials back into line.
Additionally, markets were also looking for direction to the Fed’s balance sheet reduction program.
In a process that began in June 2022, the central bank is allowing up to $60 billion in Treasury bond maturing proceeds and up to $35 billion in mortgage-backed securities to flow out each month instead of being reinvested. The process is often referred to as “quantitative tightening” and has resulted in a decline of about $1.4 trillion in the Fed’s holdings.
Powell confirmed that the issue was discussed at the meeting, but noted that no decisions were made on the extent and timing of the possible balance sheet reduction.
“Although we have not made any decisions today, the committee is generally of the opinion that it will be appropriate to slow the pace of the runoff relatively soon, consistent with the plans we have previously issued,” he said.
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2024-03-20 20:42:59
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