In a move that was unlikely to surprise, the Fed’s FOMC voted unanimously this evening to keep US interest rates on hold at 5.5% (upper bound) at the conclusion of their meeting today. This was in line with market expectations and is the fifth consecutive meeting where rates have been held at the same level since the last increase in July 2023. The statement and subsequent speech from Jay Powell, in conjunction with the US stock market hitting another all time high, have given market watchers plenty to think about in terms of where does the US economy go from here.
The Fed also today released its quarterly ‘dot plot’ which tells markets where committee members see interest rates going in the future. It showed no change from their December publication in terms of median rate expectations for the end of 2024 at 4.6%, suggesting 75bps of cuts from current levels.
The Federal Reserve has issued the following FOMC statement about the economy and their outlook:
“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
“In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. 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. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
“Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.”
Commenting on this latest Fed data, David Goebel, Associate Director of Investment Strategy at wealth manager Evelyn Partners says that, importantly, ‘It did show revised expectations for where rates will be at the end of 2025 at 3.9%, suggesting one less cut than their estimate in December.’
He continues: ‘No change in rates came as no surprise to financial markets, which were pricing the chances of a cut at less than 1% going into the meeting. There were no significant changes in the wording of the statement today, and the “dots” revealed fewer rate cuts to come but with one taken from 2025, rather than 2024 as some analysts had been speculating. Officials also increased forecasts of where they see rates settling over the long term, increasing their median estimate from 2.5% to 2.6%.
‘Interest rate expectations have moved a long way since the Fed’s last meeting on the 31 January. Immediately following that meeting, futures markets were pricing in six interest rate cuts over the course of 2024, while their “dot plot” (which was published in December) was suggesting there would be only three.
‘Since then, markets have slowly fallen into line with Fed thinking, with the latest market estimation for the number of rate cuts this year also being three, immediately before today’s meeting. That was largely thanks to month-on-month core CPI inflation prints for both January and February coming in 10 basis points higher than market expectations – stickier than expected.
‘Producer Price Index inflation readings (a price measure at the wholesale level) have also come in hotter than expected, leading to bond market inflation expectations to move from around 2.2% (CPI) annually for the next 5 years to around 2.4%. Interestingly, the Fed’s preferred measure of inflation, the PCE deflator was not stronger than expected, with the headline measure for January coming in at 2.4%. This inflationary backdrop led the Fed to increase their estimates today for PCE inflation to 2.6% from 2.4% by the end of the year.
‘On the growth side of the equation, payroll gains have been strong in January and February although unemployment ticked up to a 2 year high of 3.9%. Q1 GDP is tracking close to 2% after the remarkable strong 4% seen in the second half of last year – lower but still above the long run rate. This varied economic backdrop led the committee to repeat the guidance in the previous statement that it doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”.
‘Officials maintained the pace of quantitative tightening, with a maximum of $60 billion of Treasuries and $35 billion of mortgage-backed securities rolling off the balance sheet each month, and no guidance of any changes to this.
‘Market expectations, and our own, for interest rates have not changed. The equity market hasn’t been put off its stride by the prior moderation in cut expectations in quite the same way that the bond market has, but with futures market finally in line with the Fed, we would expect one source of volatility, particularly for the bond market, to dissipate.
‘Clearer visibility over cuts should be a more benign backdrop for positive performance from both equity and bond markets.’
Also commenting on the Fed data, James McCann, deputy chief economist, abrdn, said:
“The Fed is not panicking just yet following a pickup in inflation at the start of this year. Indeed, FOMC members continue to signal three cuts over 2024, unchanged from their forecasts in late 2023, and implying that the faster price growth seen in recent months will prove to be largely a bump on the last mile of its inflation fight.
“However, the press statement was clear that the central bank does need greater confidence that inflation is heading sustainably back to its 2% target and Chair Powell is likely to warn in his press conference that this means slower inflation data in coming months to justify cuts.
“Markets will probably breathe a sigh of relief that recent upside surprises in inflation have not triggered a more hawkish repose from the Fed today, with the central bank clearly feeling comfortable to wait and see how the inflation data evolve, especially with some tentative signs of slowing growth starting to emerge. A cut in June continues to look most likely, should inflation cool a little over coming months, and we see further indicators that activity is losing momentum against the backdrop of tight policy settings.”
PIMCO’s Tiffany Wilding, Managing Director & Economist, has also shared her view on the Fed’s interest rate decision commenting: “ The U.S. Federal Open Market Committee Meeting (FOMC) chose to maintain its interest rate at its 5.25 – 5.5% level. The statement and projections were broadly in line with expectations; while the 2024 rate forecasts, a near-term road map of what the Fed is considering regarding future interest-rate moves, was unchanged, showing 75 basis points (bps) of cuts (in line with expectations, but less hawkish than feared). Economic projections changes were also minimal with the exception of a greater than expected upward revision to 2024 growth. Notably core PCE (Personal Consumption Expenditures, the Fed’s preferred inflation measure) was also revised higher.
In terms of what this might mean, Wilding said: “Overall, we think updated projections show a Fed all but committed to starting the process of normalizing rates in the coming months, while at the same time grappling with broader questions about inflation and the interest rate sensitivity of the US economy, which will dictate the pace of cuts over the next year or two. With Fed officials still projecting that core PCE will remain in the “two point something” range, we continue to expect a baseline of 75 bps of cuts in 2024 starting in June, but view the near term risks as skewed toward fewer cuts being delivered than what is currently forecasted by Fed officials.
Wilding also shared her thoughts on what we might expect next from the Fed commenting: “Federal Reserve Chair Jerome Powell confirmed that “fairly soon” the Fed will “taper and extend” its balance sheet, which we expect will occur with the gradual reduction of Treasury runoff caps. We now expect the Fed may make this announcement as early as the May FOMC meeting, ahead of our previous expectation of a June announcement. Powell also signaled a high bar for rate hikes, downplaying inflation – calling the recent inflationary reacceleration “bumps” – and pointing to labor market resilience.”
Charles Younes, Deputy CIO at FE fundinfo, said “It’s no surprise the Fed has maintained its current level of interest rates, in line with expectations from the financial community. This is an overall positive for the bond market given the ongoing reset that the market is going through, with bond participants now aligning their views with the Fed’s own projections. The maintenance of current interest rates leaves more scope for a positive surprise than a negative impact in this space over the coming months.
“However, moving forward, a broader range of investors would like to see a better interpretation from the Fed of the latest inflation printing trends which came hotter than anticipated. The last two printings demonstrated the Fed was right to hold rates, and that the beginning of the easing cycle would start later than expected.”
Richard Carter, head of fixed interest research at Quilter Cheviot reminds us that markets are watching today’s announcements with interest commenting:
“In a widely anticipated move, the Federal Reserve has opted to maintain the current interest rate levels following its latest meeting. This decision aligns with the broader expectation that the central bank would not make significant changes to the monetary policy outlook at this point. Despite facing pressures from various economic indicators, the Fed has chosen a cautious approach, emphasising the importance of a data-driven strategy before making any adjustments to the rates.
“The Fed’s hesitance to cut rates stems from the need for more definitive data, particularly regarding inflation trends. While there has been speculation about rate cuts later in the year, with some forecasts suggesting up to three reductions, the central bank has signalled that such moves will be contingent upon clearer signs of inflation moving back towards its target.
“Analysts had previously anticipated a more aggressive rate-cutting schedule but have since recalibrated expectations, aligning them more closely with the Fed’s cautious stance. The consensus seems to point towards maintaining the status quo until more persuasive data emerges.
“While the immediate focus remains on domestic monetary policy, the Fed’s decisions are being watched closely by global markets. Central banks around the world often take cues from the Fed due to its significant impact on global financial conditions. There’s a general anticipation that once the Fed begins to shift towards easing, it could signal other central banks to follow suit, especially those in economies currently facing growth challenges.”
