FOMC meeting minutes, March 19-20

Play-by-play on a knife’s edge 

The minutes of the March Federal Open Market Committee (FOMC) meeting revealed that “all participants” favored holding the fed funds rate constant at 5.25-5.50%, and “almost all” policymakers judged it would be optimal to ease monetary policy this year if the economy evolved as expected. 

While policymakers noted that risks to achieving their dual mandate were becoming better balanced, they stressed the importance of weighing the risk of maintaining a restrictive policy stance for too long, which could unduly weaken the economy, against the risk of easing policy too quickly, which could stall or even reverse disinflation progress.

Policymakers noted in their discussion that they were still seeking greater confidence that inflation was moving sustainably toward 2%. As such, the recent strong economic data and “disappointing” inflation readings in January and February were viewed as evidence that easing monetary policy wasn’t yet the optimal decision.

Fed policymakers emphasized the importance of policy optionality and carefully assessing incoming data to judge whether inflation is moving down sustainably to 2%. 

In particular, the minutes noted elevated uncertainty regarding the inflation outlook. Policymakers stressed that upside risks to inflation stemmed from geopolitical risks, higher commodities prices and easing financial conditions that could support stronger growth and inflation. However, they also noted optimism regarding the better-balanced labor market supporting lower core non-housing inflation, slower shelter cost inflation, increases in the labor force and stronger productivity growth, as well as business contacts indicating that they were less able to pass on price increases or that consumers were becoming more sensitive to price changes. 

As Fed Chair Jerome Powell noted during the post-FOMC meeting press conference, policymakers noted that while the balance sheet runoff was proceeding smoothly, it would be prudent to begin slowing the pace of runoff “fairly soon.” This would reduce the risk of repeating money market stress (as in 2019). Policymakers favored reducing the monthly pace of runoff by half, by maintaining the existing cap on agency mortgage-backed securities while adjusting the redemption cap on Treasury securities. Policymakers favored moving to a balance sheet that consists primarily of Treasury securities in the long run.

The Fed won’t publish a new dot plot of policy rate expectations until mid-June, but if policymakers were surveyed today (after the March Consumer Price Index (CPI) report), we believe the median dot plot would show 50 basis points (bps) of rate cuts in 2024 with the fed funds rate at 4.88% in Q4 2024 – with 10 or more policymakers favoring two or fewer rate cuts this year. This aligns with current market pricing showing the odds of a June rate cut at 16% (down from 53% before the CPI report) and less than two full rate cuts priced in 2024. 

We believe market pricing is extreme with the odds of a September onset of the easing cycle at just 44% given that underlying disinflationary dynamics remain firmly in place. Specifically, cooler consumer demand growth, declining rent inflation, narrower profit margins, moderating wage growth and stronger productivity growth should prevent disinflation from stalling.

As such, the key reason why a June onset to the easing cycle looks less probable is not that disinflation has stalled, but rather that the Fed won’t have the lead time to signal greater confidence in inflation moving toward the 2% in the May statement. Indeed, we believe Fed Chair Powell would have favored shifting the key sentence in the FOMC statement into a positive one in May, signaling the onset of the easing cycle in June: “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.”

Until we see the PPI and personal consumption expenditures inflation data, we’ll maintain our view that the first rate cut will come in June and that the Fed will proceed with three rate cuts this year. However, we acknowledge the growing risk that the easing cycle may be delayed to later this summer with the Fed only proceeding with two rate cuts – not because it would be optimal, but because several policymakers have become myopically data-dependent.