The Federal Reserve kept interest rates steady on Wednesday as expected and signaled it still planned to make multiple rate cuts before the end of the year.
After a two-day policy meeting, the central bank’s rate-setting Federal Open Market Committee said it would keep its benchmark overnight borrowing rate in a range of 5.25%-5.5%, where it has been since July 2023.
In making this decision, Fed officials also plan to cut interest rates by 3 percentage points by the end of 2024, which would be the first rate cut since the early days of the COVID-19 pandemic in March 2020.
The current level of the federal funds rate is the highest level in 23 years. The rate regulates the fees banks charge each other for overnight loans, but affects many forms of consumer debt.
The prospect of three rate cuts comes from the Fed’s “dot plot,” a closely watched matrix of anonymous forecasts from 19 officials on the Federal Open Market Committee (FOMC). This chart provides no indication of the timing of changes.
The graph shows there will be three cuts in 2025 – one less than when the grid was updated last December. The committee expects three more rate cuts in 2026 and two more cuts in the future until the federal funds rate stabilizes at around 2.6%, close to what policymakers estimate is a “neutral rate” that is neither stimulus nor restrictive.
The grid is part of the Fed’s summary of economic forecasts, which also provides estimates of gross domestic product, inflation and the unemployment rate. In terms of deviation from the median, the point classification is more hawkish than in December, but not enough to change the forecast for this year.
GDP forecast raised
Officials have sharply accelerated their GDP growth forecasts for this year, now expecting the economy to grow at an annualized rate of 2.1%, up from the 1.4% forecast in December. The unemployment rate forecast was slightly lowered to 4% from the previous forecast, while the core inflation forecast, measured by personal consumption expenditures, rose to 2.6%, up 0.2 percentage points from the previous forecast, but slightly below the latest level of 2.8%. The unemployment rate in February was 3.9%.
The outlook for gross domestic product over the next two years is also gradually rising. Core PCE inflation is expected to return to target in 2026, unchanged from December.
The FOMC’s post-meeting statement was nearly identical to the one issued at its last meeting in January, except that it upgraded its assessment of job growth to “strong” from a “moderate” description of growth in January. The decision to keep interest rates unchanged was unanimous.
The market has been paying close attention to clues about the direction of the Federal Reserve’s monetary policy.
Earlier this year, traders in the federal funds futures market strongly expected the central bank to begin cutting interest rates at this week’s meeting and continue to do so until the end of the year with a total of seven rate cuts. However, recent developments have significantly changed this outlook.
Higher-than-expected inflation data starting in 2024 triggered caution among senior Fed officials. At the end of the January FOMC meeting, the central bank said it needed more evidence that prices are decelerating before it can gain “greater confidence in inflation.” ” and began to cut interest rates.
Statements from Chairman Powell and other policymakers since then have increased sentiment for a patient, data-driven approach, and markets have had to reprice. Powell and his colleagues said that while the economy remains healthy and the unemployment rate is below 4%, a more cautious approach can be taken in easing monetary policy.
This week’s meeting is expected to deliver the first rate cut in June, followed by two more cuts, bringing markets and Fed officials back into line.
In addition, the market is also looking for the direction of the Federal Reserve’s balance sheet reduction plan.
In a process that begins in June 2022, the central bank will allow up to $60 billion per month of maturity proceeds on Treasury securities and up to $35 billion per month on mortgage-backed securities to be rolled over rather than reinvested. This process, often referred to as “quantitative tightening,” resulted in the Fed reducing its assets by approximately $1.4 trillion.
However, there was no immediate information on QT changes, although Powell repeatedly said the matter would be discussed at this meeting. Powell’s post-meeting press conference and minutes from the meeting released three weeks later may provide additional insights.
About The Author
