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March Federal Open Market Committee meeting: After action report

March Federal Open Market Committee meeting: After action report
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ARTICLE TYPE
Insights
TOPIC
Macro
PUBLISHED
March 22,2024
READ TIME
4 mins
AUTHOR
Frank Rybinski, CFA
SHARE
Back
ARTICLE TYPE Insights
TOPIC Macro
PUBLISHED March 22,2024
READ TIME 4 mins read
AUTHOR Frank Rybinski, CFA
SHARE

Wednesday’s Federal Open Market Committee meeting brought no change in the central bank’s interest-rate policy. The Fed kept its benchmark fed-funds rate at 5.25% to 5.5%, a 23-year high and the same level it’s been at since July 2023. That wasn’t unexpected and the Street focused on the forecasts in the Fed’s Summary of Economic Projections (SEP)— including the dot plot maps that show central bank members’ expectations for future interest rates—and the press conference after the two-day meeting.

   

Updating our Fed Call

Our base case is now that the rate-cutting cycle will likely commence in June (we previously expected it to begin in July). And we now expect the Fed will make three rate cuts in 2024 of 25 basis points each. Our previous outlook called for four rate cuts.

 

This change in the start date has less to do with the need to start 49 days sooner and more to do with updating the sequencing (i.e., switching from sequential cuts to quarterly cuts). So why three quarterly cuts? Given the macro backdrop, the Fed wants to slowly let air out of the restrictive policy balloon on its way to normalization. Sequential cuts are more in response to a concern about growth slowing from monetary policy staying restrictive for too long.

 

Cruising speed … forever 

That’s basically what the Fed’s SEP forecasts imply: Growth above 2% as far as the eye can see. Ironically, this is above policymakers’ own forecast for trend growth, making one question the need to cut rates at all. (I say that half in jest, as I recognize that there is some interplay of lower rates on the Fed’s updated optimistic forecast). In short, the Fed’s forecast picture is about as perfect as one could paint. This new forecast is the catalyst for the shallower rate path in coming years (2025 and 2026).

 

Inflation – Spotlight on the spring data

Federal Reserve Chairman Powell’s views align with our assessment that the January and February inflation data represent pockets of turbulence on the dis-inflationary path. 

 

This does put a much higher bar on the inflation reports that come out this spring before the Fed’s June meeting (three consumer price index reports and two personal consumption expenditures reports). If there isn’t a slowdown from the January and February readings, then, in the immortal words of Apollo 13: “Houston, we have a problem.”

 

Aegon AM Economic Forecasts

 

 

2021

2022

2023

2024e

2025e

GDP (real %, year over year)

5.8

1.9

2.4

1.8

1.7

Unemployment (%)

5.4

3.6

3.7

4.0

4.1

Core PCE (% year over year)

3.2

5.2

4.2

2.4

2.2

Fed funds: Upper bound

0.25

4.50

5.50

4.75

3.75

10-year Treasury

1.51

3.88

3.88

4.00

4.00

As of March 21, 2024.

Important disclosures

AegonAM_March_FOMC_After_Action_Report.pdf

(94KB) PDF

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More about the authors

Frank Rybinski, CFA Head of Macro Strategy

Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation.

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