Meeting Highlights 

  • Surprising nobody, the Fed left the fed funds target rate unchanged at 5.25% – 5.50%.  The updated 2024 rate forecast, or dot plot, now sees one rate cut in 2024 versus three cuts in the March forecast. There was some thought it could be two cuts given today’s cooler May CPI, but with the first quarter hotter-than-expected one positive inflation report wasn’t enough to sway the Committee to forecast two cuts. They did, however, increase the expected 2025 and 2026 rate cuts from three to four as something of a consolation prize to the two-cut crowd. So, that leaves the median rate in those years 25bp above the March forecast. There was minimal change to the statement with inflation progress changed to “modest” from “lack of progress.”

 

  • Futures pricing prior to the announcement had the first rate cut penciled in for the September meeting (65% odds), and another cut in December. After the updated information, the market has lowered the odds for a September cut to 60% and slightly reduced the odds for a cut in December. So, the market is not giving up on the two cuts scenario this year just yet.

 

  • The Fed did nudge the long-run dot from 2.562% to 2.75%. That’s the second straight increase in the neutral rate forecast which had been at 2.50% since 2019 and is recognition that the post-pandemic economy is at a higher cost plateau than pre-Covid. The increase so far is not enough to bring into doubt whether the current fed funds rate is sufficiently restrictive, and that was buttressed by today’s favorable CPI report.

 

  • On inflation, the Fed upped their 2024 core PCE forecast from 2.6% to 2.8%. We are currently at 2.8% (2.849% unrounded). After today’s CPI and tomorrow’s PPI numbers the market will begin to estimate May core PCE with some already calling for it to drop to 2.6%, so a fairly conservative forecast by the Fed today. The 2025 and 2026 forecasts were kept mostly the same as March at 2.3% and 2.0%, respectively.

 

  • As for the labor market, the Fed’s new forecast is for the unemployment rate to be 4.0% at year-end, same as the March forecast. That’s somewhat surprising given May unemployment is already at 4.0%.  For 2025, unemployment is forecast to increase to 4.2% and 4.1% in 2026, both are one-tenth higher than the March forecast. The minimal increases in the unemployment rate forecast are a recognition of the resilience of the labor market, and a nod to the Fed’s soft-landing prediction.

 

  • On GDP, the Fed has it at 2.1% for 2024 same  as the March forecast. The pace is expected to slow slightly to 2.0% in 2025 and 2026, also unchanged from the March forecast. The GDP projections also reflect the Fed’s continued belief in their soft-landing call. 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, and the forecast of one rate cut this year may have disappointed some, but the Fed offset that with an upgrade to four cuts from three in 2025 and 2026.

 

  • 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 both the latest CPI and employment reports. The former was broadly lower than what the first quarter showed so he may offer some encouraging words on inflation; however, tempering it with the “more improvement is needed.”

 

  • The employment report was strong but with some noise so it will be interesting to hear his take. We suspect, the 0.4% MoM pop in wages will be a concern. In any event, it will be instructive to see how he views the state of the labor market given not just the hotter-than-expected BLS report but other indicators like JOLTS, ISMs, and the Household Survey that reflected some slowing. We suspect he will respond that if the summer inflation reports come close to May, they could be in a position to cut in September which would still allow for two cuts by year-end if inflation cooperates.

Updated Dot Plot –  One Cut in 2024 but Four Cuts in 2025 and 2026

Source: Bloomberg


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Published: 06/12/24 Author: Thomas R. Fitzgerald