FOMC meeting, March 19–20

Powell downplays data noise but refrains from a clear policy signal

The Federal Open Market Committee (FOMC) voted unanimously to hold the federal funds rate at 5.25-5.50%. The statement was largely unchanged, the dot plot continued to show three rate cuts in 2024 – the same as in the December dot plot – and GDP growth projections were revised up without a commensurate upgrade to inflation and employment, signaling a belief in non-inflationary growth supported by stronger productivity.


We continue to expect the onset of the Fed easing cycle in June, and we believe the Fed is more likely to proceed with three rate cuts in 2024, rather than the four we had previously anticipated.


1. Optionality in the statement. There were almost no changes to the FOMC statement and the sentence noting “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” was preserved.


We believe that sentence may be turned into a positive statement in May, signaling the onset of the easing cycle in June while preserving policy optionality: “The Committee expects it will be appropriate to reduce the target range once it has gained greater confidence that inflation is moving sustainably toward 2 percent.”


2. Vote tally. There were no dissents to the FOMC policy decision as no Fed policymaker has expressed significant conviction in the need to immediately alter the monetary policy stance. While there is a broad consensus that the policy rate is likely at its peak and officials view risks to the outlook as being more balanced, there is still a lingering fear that inflation could reignite.


3. Dot plot points to three cuts per year. The median dot plot continues to indicate 75 basis points (bps) of rate cuts in 2024 with the fed funds rate at 4.63% in Q4 2024. The tally shows nine policymakers favoring three cuts and one official favoring four cuts this year while nine favor two or fewer cuts. The Q4 2025 median projection was revised up by 25bps to 3.9% indicating 75bps of rate cuts next year. The estimate of the long-term neutral rate was revised up marginally (10bps) to 2.6%, but Fed Chair Jerome Powell noted the precise estimate matters less than the fact that rates will likely stabilize higher than in the decade pre-pandemic.


4. Summary of Economic Projections (SEP). The new SEP illustrates Fed officials’ belief that non-inflationary growth can be sustained via stronger labor supply and productivity growth.

  • The 2024 GDP growth outlook was revised up significantly to 2.1% year over year (y/y) in Q4 (versus 1.4% previously). GDP growth was also nudged higher to 2% in both 2025 and 2026 from 1.8% and 1.9%, respectively. The unemployment rate is now expected to rise mildly toward 4.0% in Q4 2024, compared with 4.1% previously.
  • Fed officials acknowledged that the last disinflation mile could prove a little “bumpier” than anticipated, but they continue to anticipate disinflation. Core inflation projections were revised up slightly: core personal consumption expenditures inflation is expected at 2.6% y/y in Q4 2024 (versus 2.4% previously), while the 2025 projection remained unchanged at 2.2% y/y.
  • While most policymakers saw the risks to the core inflation outlook as broadly balanced in December, a majority now views risks as tilted to the upside.


5. Discussion balance sheet normalization. Fed Chair Powell noted ongoing discussions regarding the likely timing of quantitative tightening (QT) tapering. He stressed that while the FOMC hadn’t made any decision, “it will be appropriate to slow the pace of run-off fairly soon.” He added that the aim was to avoid the mistakes of the past when there was liquidity stress (like in 2019). The Fed will be carefully slowing the QT process to ensure a smooth transition to an “ample” level of reserves. Decisions on the ideal composition and maturity of the balance sheet will be made later, but the Fed favors a balance sheet that is mostly composed of Treasuries.


6. Neutral press conference. Fed Chair Powell reiterated the now-familiar message that the policy rate is likely at its peak and that it would likely be appropriate to start easing policy “at some point this year.”


He acknowledged the notable easing of inflation over the past year and noted that the stronger-than-expected inflation readings in January and February were more noise than signal. In particular, he said “January/February inflation data haven't changed the overall story of inflation moving down gradually on a sometimes-bumpy road toward 2%.” This acknowledgment of inflation bumpiness is a significant pushback against the misleading narrative of entrenched inflation and inflation resurgence on reaccelerating economic activity – neither of which are true.


Powell said that while the higher January and February inflation readings certainly haven’t raised anyone’s confidence that inflation is moving sustainably toward 2%, “the story is essentially the same: inflation coming down gradually toward 2% on a sometimes-bumpy path.”


Powell further added that “strong job growth is not a reason for us to be concerned about inflation,” acknowledging the labor supply rebound and implicitly suggesting stronger productivity growth is part of the picture. He noted: “You saw that last year, strong hiring and inflation coming down quickly.”


On the recent easing of financial conditions, Powell noted that the committee believes financial conditions are weighing on economic activity, and that is the most important factor.


He highlighted the two-sided risks of easing monetary policy too soon or too late, but maintained a relatively neutral tone instead of focusing on the fact that reducing policy restraint too soon or too much could result in a reversal of the progress seen in inflation.


When asked whether unanimity would be required for the onset of the easing cycle, he stressed that the Fed was a “consensus-oriented organization, but people do dissent ... Life goes on ...”

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