FOMC meeting preview, March 19-20

Risk of being overly hawkish when gentler would be better

  • The Federal Reserve will hold the federal funds rate unchanged at 5.25-5.50% at next week’s Federal Open Market Committee (FOMC) meeting. That much we know. 
  • The policy statement will largely remain unchanged as we believe policymakers will only change the negative conditionality statement (“the Committee does not expect …”) into a positive one once they’re ready to signal the onset of the easing cycle. We foresee the statement being altered in May to signal a forthcoming rate cut at the June FOMC meeting.
  • We anticipate the dot plot will feature two 25 basis points (bps) rate cuts in 2024, down from three in the December median projections. Some inflation-fearful policymakers are likely to confuse economic data noise for signal, or at the very least justify a more hawkish stance based on the uncertainty surrounding the hotter-than-expected inflation and employment figures.
  • Economic projections for 2024 GDP growth, unemployment and inflation are unlikely to differ much from the December projections.
  • We look for Fed Chair Jerome Powell to be less transparent than he was in January regarding the May and June meetings being “live” for potential rate cuts. However, we do anticipate he will stress that Fed policymakers have started discussing policy easing as well as the timing and logistics of tapering the balance sheet quantitative tightening process.  


1. Optionality in the statement. With most Fed officials noting in recent communications the risks of moving too quickly in cutting the federal funds rate, we anticipate very limited changes to the FOMC statement. The particular focus will be on 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.” We believe the statement will be preserved at this meeting but may be turned into a positive statement in May, signaling the nearing onset of the easing cycle 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. We don’t foresee any dissents to the FOMC statement as no Fed policymaker has expressed significant conviction in the need to immediately tighten or loosen policy further. 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 lingering fear that inflation could reignite. Indeed, only a couple of participants stressed the risks associated with policy being overly restrictive in the minutes of the January FOMC meeting.


3. More hawkish dot plot. The median dot plot will likely indicate only 50bps of cuts in 2024, down from 75bps in the December dot plot. We believe at least two Fed officials will adjust their view from three rate cuts to two, favoring a fed funds rate at 4.88% in Q4 2024. The Q4 2025 median projection will also likely move up by 25bps to 4.88%, indicating 100bps of rate cuts next year.


4. Summary of economic projections. The summary of economic projections (SEP) is unlikely to change much. We anticipate the new projections will show GDP growth a tick higher at 1.5% year over year (y/y) in Q4 (in line with our projection), but no changes to 2025-26. We believe the unemployment rate projection is likely to remain at 4.1% in Q4 2024. 


On the inflation front, we foresee the core personal consumption expenditures (PCE) inflation projections rising a tick to 2.5% y/y in Q4 2024 and remaining at 2.2% y/y in Q4 2025. Our view is that core PCE inflation will close 2024 at 2.4% while ending 2025 around 2.1% y/y. 


5. Balance sheet. We anticipate that Fed Chair Powell will note ongoing discussions regarding the likely timing of quantitative tightening (QT) tapering, the favored composition of tapering between Treasuries and mortgages, and the likely horizon of tapering. However, he will likely refrain from providing specifics on the implementation process. We do not anticipate the tapering will start before H2 2024.


6. Delicate press conference. Fed Chair Powell will reiterate 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 will likely acknowledge the “notable” easing of inflation over the past year but stress that the economic outlook remains uncertain and progress toward the 2% inflation target is “not assured.” 


We anticipate Powell will note the two-sided risks of easing monetary policy too soon or too late but maintain a hawkish bias, focusing on the fact that reducing policy restraint too soon or too much could result in a reversal of the progress seen in inflation.


We anticipate Powell will also stress the importance of the employment mandate amid increasing evidence of a slowdown in labor demand.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.