Key Takeaways from the Fed Meeting
We answer the three key questions that are top of mind for investors following the latest Fed meeting.
The March Fed meeting was never going to be about March, but about the rest of 2024. Heading into the decision, three questions were top of mind for investors:
- Timing of the first rate cut
- Magnitude of rate cuts for the year
- Timing of tapering of quantitative tightening (QT)
Our Take on the Three Key Investor Questions
1. Timing of the first rate cut: June continues to be the most likely month to begin the easing cycle (Figure 1). By then, the Federal Open Market Committee (FOMC) will have three more inflation reports and labor market reports in hand – enough for them, in our view, to “gain greater confidence that inflation is moving sustainably toward 2 percent”.
2. Magnitude of rate cuts for the year: The dot plot continues to show three rate cuts this year, the same as in December. However, only three cuts are now expected in 2025 (versus four previously) and the long-run neutral rate was nudged up by a tenth to 2.6%. Given how uncertain the outlook is, neither change is particularly relevant for 2024 policy decisions. We continue to believe that there is room for more cuts this year but especially in 2025.
In fact, if the FOMC does not deliver the 4-5 cuts we expect for 2024, we believe more of them would end up clustered in 2025. The nudge upward in the neutral rate estimate is both minimal and unsurprising and should be taken to reflect a recognition of uncertainties rather than high conviction on the part of the FOMC.
3. Timing of tapering of QT: Regarding balance sheet policy, nothing was officially communicated in the statement, but Fed Chair Jerome Powell mentioned during the press conference that the time to slow balance sheet runoffs could arrive “fairly soon”. Reading between the lines, we would expect a formal announcement at the May meeting.
As pointed out by us before, Chair Powell highlighted the value of “slower for longer” on balance sheet: by moving more carefully, the Fed can avoid triggering undue stress and needing to end QT before the balance sheet reaches the desired level.
Changes to Economic Forecasts
Finally, there were some changes to economic forecasts, most significantly for 2024. Q4/Q4 GDP growth was revised meaningfully higher—perhaps a touch too much in our view—and core personal consumption expenditures estimate was revised up two tenths to 2.6% YoY.
The latter matches our forecast but does not change our belief that, despite not being at target just yet, the Fed can afford to ease more, especially since we see upside risks to the Fed unemployment rate forecast.