Fed Keeps Three Rate Cuts in Latest 2024 Forecast

Meeting Highlights

• As expected, the Fed left the fed funds target rate unchanged at 5.25% – 5.50%, matching the market consensus.  The updated 2024 rate forecast, or dot plot, also was unchanged from December with three rate cuts expected in 2024. There was a lot of talk that it could be reduced to two cuts given the recent spate of hotter-than-expected inflation reports. This must signal the Fed is content that the downward trend in inflation is intact, despite the January and February reports. The Fed did reduce the expected 2025 rate cuts to three vs. four cuts in the December forecast.

 

• Futures pricing prior to the announcement had the first rate cut penciled in for the June meeting (60% odds), and 74 bps in cuts for all of 2024 with the funds rate at 4.60% by year-end. After the updated information, the market has upped the odds for a June cut to 67% and a total of 80bps in cuts during 2024 with the funds rate at 4.50%.

 

• On inflation, the Fed bumped their 2024 core PCE forecast from 2.4% to 2.6%. We are currently at 2.8% (2.849% unrounded). January core was 0.4% MoM and February is expected to print 0.3%, so core PCE would have to average 0.18% MoM to reach the previously forecasted 2.4% by year-end. That apparently was a bridge too far for the Fed, so they bumped it two-tenths higher. The 2025 and 2026 forecasts were kept unchanged at 2.2% and 2.0%, respectively. As the side-by-side statement shows in the attachment, there was scant change in today’s statement.

 

• As for the labor market, the Fed’s new forecast is for the unemployment rate to tick up from 3.9% currently to 4.0% at year-end, a slight improvement from the 4.1% December forecast.  Then, unemployment is forecast to remain at 4.1% in 2025 and 4.0% in 2026, similar to the December forecast. The minimal increases in the unemployment rate forecast are a recognition of the resilience of the labor market to date.

 

• On GDP, the Fed now has it at 2.1% for 2024 vs. 1.4% in the December forecast. The pace is expected to slow slightly to 2.0% in 2025 and 2026, both are slightly improved from the December forecast. The GDP projections reflect the Fed’s continued belief in the soft-landing scenario. When the Fed first started projecting this outcome it was seen by many as wishful thinking, but as 2023 unfolded market belief in a soft landing increased as economic results consistently surprised to the upside.

 

• Overall, the Fed delivered its expected pause, but the mild surprise was keeping with three rate cuts this year, same as the December forecast. They did this despite raising the GDP and inflation forecast. That’s a dovish take. They did lower the 2025 expected rate cuts from four to three with three in 2026 as well. This is a modest recognition that inflation and economic strength will be stronger than previously expected. To be sure, inflation and job market data between now and June will be key in determining whether rate cuts happen in June or July. They did nudge the long-run dot from 2.5% to 2.562%. That’s very slight recognition that the post-pandemic economy is at a slightly higher cost plateau than pre-Covid.

 

• The press conference will afford Powell an opportunity to add more color to the Fed’s latest forecast today. He’ll get a chance to opine on whether the committee’s view that the inflation improvement from last year is evaporating, or whether they view it as just a bump along the road to 2.0%. Given they are still projecting three rate cuts that implies they view the hotter numbers as more a bump in the road. He will no doubt be asked whether his comment from recent Capitol Hill testimony that the committee is “not far” from being confident that inflation is trending in the right direction is still accurate. We suspect he will respond that they will be guided by the data, and with the economy continuing to defy expectations, he has time to exercise patience with that data.

 

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Latest Fed Dot Plot

 

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