The Federal Reserve (US central bank) on Wednesday kept interest rates steady as expected and indicated that it still plans multiple cuts before the end of the year.
After the two-day policy meeting, the Federal Open Market Committee, which sets interest rates, said the central bank would keep its benchmark overnight borrowing rate in a range of 5.25% to 5.5%, where it has remained steady since July 2023.
Along with the decision, Fed officials planned three quarter-point cuts by the end of 2024, which would be the first cuts since the early days of the Covid pandemic in March 2020.
The current level of the federal funds rate is the highest in more than 23 years. The rate determines what banks charge each other for overnight lending, but it fuels many forms of consumer debt.
Expectations for three cuts came from the Fed's “dot chart,” a closely watched matrix of anonymous forecasts from the 19 officials who make up the Federal Open Market Committee. The chart provides no indication of the timing of the moves.
Fed Chairman Jerome Powell said the Fed had not clarified the timing either, but said it still expects cuts to occur, as long as the data is cooperative. Post-meeting futures markets were pricing in a roughly 75% probability that the first cut would come at the June 11-12 meeting, according to CME Group's FedWatch gauge.
“We believe that our interest rate is likely to peak for this type of cycle, and that if the economy develops broadly as expected, it will likely be appropriate to begin unwinding policy restrictions sometime this year,” Powell said in his speech. “. Press conference after the meeting. “We are willing to maintain the current target range for the federal funds rate for longer if appropriate.”
The plot indicates three downgrades in 2025, one less than the last time the network was updated in December. The committee expects three more cuts in 2026 and then two more in the future until the federal funds rate stabilizes at about 2.6%, near what policymakers estimate is a “neutral rate” that is neither stimulative nor restrictive.
The grid is part of the Federal Reserve's Summary of Economic Outlook, which also provides estimates of GDP, inflation and unemployment. The set of points deviated somewhat from December's tightening in terms of deviations from the mean, but not enough to change this year's outlook.
Markets rose after the FOMC decision. The Dow Jones Industrial Average ended the session up 401 points, or just over 1%. Treasury yields have trended mostly lower, with the benchmark 10-year note recently at 4.28%, versus 0.01 percentage point.
“The sum total of this press conference saying no news is good news is that markets are still getting a green light to go higher,” said Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors. “We were not surprised to see the initial reaction from investors of pushing stock prices higher and we expect that to continue until some new shocks hit the system because the Fed will not stand in the way of a bull market.”
Raises GDP expectations
Officials have sharply accelerated their forecasts for GDP growth this year and now see the economy operating at a 2.1% annual rate, up from a 1.4% estimate in December. Unemployment rate expectations fell slightly from the previous estimate to 4%, while core inflation expectations as measured by personal consumption expenditures rose to 2.6%, 0.2 percentage points higher than previously but slightly below the recent level of 2.8%. The unemployment rate for February was 3.9%.
GDP expectations have also risen increasingly over the next two years. Core PCE inflation is expected to return to target by 2026, as was the case in December.
The FOMC's statement after the meeting was almost identical to the one given at its last meeting in January except for upgrading the job growth assessment to “strong” compared to January's description of gains as “moderate.” The decision to freeze interest rates was approved unanimously.
Markets have been watching closely for clues on where the Fed will go from here with monetary policy.
Earlier this year, traders in the federal funds futures market aggressively priced in the possibility that the central bank would start cutting at this week's meeting and continue doing so until the total cuts reach seven by the end of the year. However, recent developments have dramatically changed that outlook.
Higher-than-expected inflation data to start 2024 sparked caution from senior Fed officials, and the Federal Open Market Committee meeting in January concluded with the central bank saying it needs more evidence that prices are slowing before it can gain “more confidence” about inflation and start lowering it. .
Statements by Powell and other policymakers since then have added to the sentiment of a patient, data-driven approach, and markets have been forced to reprice. Powell and his colleagues have noted that with the economy still growing at a healthy pace and the unemployment rate below 4%, they could take a more measured approach when easing monetary policy.
“The economy is strong, inflation is down significantly, and that gives us the ability to deal with this issue carefully and we feel more confident that inflation is moving down sustainably at 2% when we take that step to start to move back,” Powell said. Our restrictive policy.”
The first cut is expected to take place at this week's June meeting and then two more will follow, bringing markets and Fed officials back into alignment.
Furthermore, markets were also looking for some direction on the Fed's balance sheet reduction programme.
In a process that began in June 2022, the central bank is allowing up to $60 billion a month in proceeds accruing from Treasury bonds as well as up to $35 billion in mortgage-backed securities to be rolled over each month rather than reinvested. This process is often referred to as “quantitative tightening” and has resulted in the withdrawal of about $1.4 trillion from the Fed’s holdings.
Powell confirmed that this issue was discussed at the meeting but noted that no decisions had been made on the extent and timing of the potential reduction in the balance sheet.
“Although we have not made any decisions today, the committee's general feeling is that it would be appropriate to slow the pace of the runoff fairly soon, consistent with the plans we have previously issued,” he said.
