Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group

In line with market expectations, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged in a target range of 5.25% – 5.50%. There were no dissents. 

There were very limited changes to the committee statement:

  • The economic assessment was little changed and continued to recognize that activity is expanding at a solid pace, job gains are strong, and the unemployment rate is low. The risks to their dual mandate are moving into better balance.
  • The forward guidance was unchanged: The Fed stated for a second meeting in a row that it “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%.”

Summary of Economic Projections:

  • The dot plot gave us a refreshed view of the Committee’s expectation for the path of the Fed Funds ratewhich showed the vast majority of participants continue to anticipate rate cuts in 2024 and all participants see some rate cuts as appropriate through the forecast horizon.
    • The median member expects the policy rate to fall to 4.625% by YE 2024 which is equivalent to 75bps of rate cuts in 2024. Only two members expect the Fed to keep the policy rate unchanged next year. Only one policy member sees 4 rate cuts this year.
    • The median member expects an additional 75bps of cuts in 2025 and 2026 which would put the policy rate at 3.125% by year-end 2026. Relative to December, that is 25bps fewer rate cuts in 2025 and 2026.
    • The long run dot shifted higher to 2.6%. The Fed’s neutral rate (R*) estimate has been essentially unchanged at 2.5% since June 2019 and had been previously trending lower since the inception of the dot plot in 2012, in which the estimate originally stood at 4.25%. In recent months, Fed members have discussed the possibility that R* is higher than previously anticipated.
  • Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
    • The Core PCE forecast for 2024 was revised higher by 0.2% to 2.6%. The number of participants viewing core inflation risks as weighted to the upside remains elevated at 11 members.
    • Growth was upgraded significantly from 1.4 to 2.1% in 2024. Longer term growth was unchanged at 1.8%.
    • Unemployment rate estimates were mostly unchanged reflecting a soft-landing outcome. The median committee member sees unemployment remaining around 4% over the next three years.

Key Takeaways from Chair’s Press Conference:

  • On the policy rate, the Chair believes that it “is likely at its peak for this time in the cycle and if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
  • On inflation, the Fed didn’t want to dismiss the high January CPI and PCE numbers, but also expects the February PCE number to be lower and when combined, “they haven't really changed the over-all story which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%”. 
  • On QT, Chair Powell explained that “while we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon.” 
  • On the long-term neutral rate, they recognize that rates were “generally low during the pre-pandemic post-financial era” and his instinct is that “rates will not go back to the very low levels…but there’s tremendous uncertainty.”

Our View:

  • We have reached the end of the hiking cycle and the risks to achieving the Fed’s dual mandate of stable 2% inflation and maximum employment are now more balanced. The question remains how soon, how fast, and how far the Fed will cut rates.
  • Given that the Fed is biased toward easing policy in 2024, Treasury yields should be skewed lower over time as investors look to lock in relatively high risk-free rates while they are still available. We expect the Fed to deliver its first rate cut this summer and the 10-year Treasury yields to move towards a range of 3.5 – 4.0% as the Fed reduces policy restriction.