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The Federal Open Market Committee (FOMC) met this week and voted unanimously to hold rates steady for the fifth consecutive meeting, leaving its policy range at 5.25 percent to 5.5 percent. This came as no surprise, with futures markets indicating a near-zero percent chance of a rate cut in the days and weeks leading up to the decision.
We entered 2024 with a March rate cut almost fully priced into expectations. So, why did Fed officials decide to keep their rate policy unchanged, and how do things look moving forward?
The Last Mile Is the Hardest
Consumer price growth peaked at over 9 percent in June 2022, but significant progress has been made to bring that number down to just over 3 percent in recent periods. Even so, the drop in inflation has stalled in the past few months, raising questions about how stubborn consumer prices will be in the home stretch leading to the Fed’s 2 percent target. With that concern in mind, along with resilient economic activity and continued strength in the labor market, it makes sense that the Fed wants to see more meaningful progress before starting to ease.
Dot Plot Marks the Spot
Yesterday’s meeting came with the release of an updated summary of economic projections, including a dot plot indicating that the median committee member expects three quarter-point cuts by the end of 2024. While there were some minor shifts in the overall dot plot, this median expectation remains unchanged from the December meeting.
As recently as February, markets were anticipating up to five or six rate cuts for the year. Those expectations have come down in recent weeks. For the first time in quite a while, the FOMC and markets are on the same page with calls for just three cuts. This development is particularly notable in the absence of any major shocks or shifts in economic trends, with markets seeming to fall in line with the Fed’s consistent messaging.
It's a Balancing Act
While the discussion around interest rates dominates the narrative, we must not forget the Fed is also fighting inflation by systematically running off its balance sheet to remove additional cash from the market. This process of quantitative tightening has been happening at a historic pace, with the Fed’s security holdings declining by roughly $1.5 trillion since the process began. While this most recent meeting included in-depth conversation around slowing the pace of the run-off, there were no specific details communicated to the public other than the committee’s general consensus that it will be appropriate to slow the pace “fairly soon.”
More to Come
Ultimately, the FOMC maintains its stance of meeting-to-meeting data dependency, so we’ll be keeping tabs on incoming data and additional Fed comments in the weeks and months to come. We plan to continue these post-meeting blogs, so be sure to subscribe to The Independent Market Observer to stay up to date. The next FOMC meeting is scheduled for April 30–May 1, and we’ll be here to help you digest Fed developments as we get further into the year.
