It was all about the FOMC yesterday.

In a unanimous decision, the Fed held the benchmark lending rate at 5.25%-5.50% for a fifth consecutive meeting (this is the highest rate in more than two decades), as widely expected. The majority of Fed officials also still favour three rate cuts this year, which was moderately dovish as there was speculation leading up to the event that Fed officials may downshift to two rate cuts.

Three Rate Cuts for 2024

The quarterly Summary of Economic Projections (SEP) was released alongside the rate announcement. Fed officials, as communicated above, still expect to ease policy by three quarter-point rate cuts by year-end, unchanged from December’s (2023) projections. However, what is important to take on board here is that rates are expected to be higher in 2025/26 than initially forecast three months ago. As you can see from the Economic Projections table below, forecasts for 2025 and 2026 were revised upward to 3.9% (from 3.6%) and 3.1% (from 2.9%), respectively. The longer-run rate was also shifted higher to 2.6% from 2.5%.

Upward Revision to 2024 Inflation

Following hotter readings of CPI and PPI inflation for February (as also displayed in the Economic Projections table below), the March projections showed an upward revision in Core PCE inflation for 2024 from 2.4% (December 2023 projection) to 2.6%, though it remained unchanged for 2025 and 2026 at 2.2% and 2.0%, respectively. You will note they also lowered the unemployment rate projection for this year to 4.0% from December’s projection of 4.1%. Additionally, an upward revision to real GDP was seen this year from December’s 1.4% to 2.1%; 2025 and 2026 also observed moderate upward revisions to 2.0%, respectively.

As illustrated on the FOMC dot plot below, albeit not showing a timeline for potential rate cuts, the median estimate of the target range for the Fed funds rate at the end of 2025 is now at 3.75%-4.00% (this is up from 3.50%-3.75% in December [2023]) and by the end of 2026, we see the median estimate showing a target range of 3.00%-3.25% (up from 2.75%-3.00% in December). Finally, the longer-run median estimate for the target range is at 2.50%-2.75% (up from 2.25%-2.50%).

Rate Statement/Presser

In terms of the accompanying Rate Statement, limited change was seen, maintaining the following sentences:

‘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’.

Thirty minutes after the rate announcement and the release of the Rate Statement/Projections, Fed Chair Powell took the stage and echoed a similar vibe in that he continues to seek confirmation that inflation is moving in the right direction. He also commented that the Fed funds rate is likely at its peak and would be necessary to begin policy easing at some point in the year. Additional comments were that the economy has made considerable progress but although inflation has eased substantially, it is still too high. Powell added that resilient GDP is bolstered by strong consumer demand and noted that the labour market is still tight. However, he also noted that strong hiring would not be a reason to hold off on rate cuts, adding that the job market by itself is not cause for concern around inflation.

So, overall, we still expect rate cuts this year (and markets are still fully pricing in the first 25bp cut for July’s meeting), but this will not occur until the Fed is confident that inflation is drawing towards that 2.0% inflation target.