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We do not expect the FOMC to change the federal funds rate or alter its current pace of balance sheet runoff at its upcoming meeting on March 19-20.
Since the Committee last met, the U.S. inflation data have come in a bit stronger than expected, while the labor market generally has remained resilient. With payroll growth still solid and inflation proving to be a bit stickier recently, we suspect the FOMC will still be seeking greater confidence at the end of its meeting next week that inflation is headed back to 2% on a durable basis.
That said, beneath the robust headline figures, we see building evidence that the labor market is cooling and inflation is still slowing on trend. Chair Powell testified to Congress shortly before the March blackout period that the Committee is "not far" from the confidence needed to dial back the level of policy restriction.
We now expect the FOMC will initiate the first cut to the federal funds rate at its June 12 meeting (our previous expectation was at the May 1 meeting). We look for 100 bps of easing in total this year and another 100 bps of easing over the course of 2025 to bring the fed funds target range to 3.25%-3.50% by year-end 2025.
In light of the recent slate of data and Fed-speak, we see few changes to the post-meeting statement after a meaningful rework following the January meeting.
The March meeting will include an update to the Committee's Summary of Economic Projections (SEP). We do not expect material changes to the median projections for real GDP growth and the unemployment rate.
The story is similar for inflation. Our most recent forecast projects headline and core PCE inflation of 2.3% and 2.5%, respectively, in 2024. The Committee's median projection in the December SEP was 2.4% for both headline and core PCE, suggesting that the current outlook is not materially different from December for most FOMC members. We think the core PCE inflation median for 2024 will rise by a tenth or so, putting it closer to the midpoint of the central tendency range from December.
That said, even if the magnitude of the changes to the outlook for growth and inflation are relatively small, the direction of the revisions likely will be toward a hotter outlook, i.e. faster growth, and higher inflation. Will the dots follow suit?
Our base case is that the median dot for 2024 will remain unchanged at 4.625%, but the risks are skewed toward a higher median given the distribution of the prior dots and the recent run of inflation data. Similarly, we expect no change to the 2025 and 2026 median dots, though here too we think the risks are skewed to the upside.
A slowdown in the pace of the Fed's balance sheet runoff program also appears to be coming closer into view, and the Committee is likely to have a broad discussion of the central bank's plan for quantitative tightening (QT) at the March meeting.
Our base case remains that the FOMC will announce a plan to slow the pace of QT at its June meeting, although we would not be shocked if the Committee decided to do so one meeting earlier or later. Specifically, we expect the runoff caps for Treasury securities to be reduced to $30 billion while MBS caps are dropped to $20 billion starting on July 1. We anticipate this slower pace of QT running until year-end 2024.
A little more conversation, but still no action
We do not expect any policy changes from the FOMC at its meeting next week, but the Committee's post-meeting communications should shed more light on the potential path of policy adjustments later this year. The prospects of the first rate cut occurring on March 20 initially started to slip away at the end of the Committee's last meeting on January 31. In the post-meeting press conference, Chair Powell shared that "I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that." Since then, generally stronger-than-expected data and the string of Fed officials indicating they are in no big rush to ease policy have driven down the odds of a rate cut at next week's meeting to essentially nil. Expectations that a rate cut could first come at the May 1 meeting have also been pared back (Figure 1).
The tempered expectations for rate cuts follows a pickup in inflation to start the year. After the 6-month annualized rate of change in the core PCE deflator slowed to below 2% in the second half of last year, a hot print at the start of 2024 pushed this rate back up to 2.5% in January (Figure 2). The Consumer Price Index, which includes data through February, shows core inflation running at a 4.2% annualized rate the past three months compared to the 3.3% clip at the time of the FOMC's past meeting.
Job growth has also held up well in recent months. In February, nonfarm payrolls again surpassed consensus expectations, and the three-month average pace of 265K remains well above the ~100K pace that we estimate is currently needed to absorb labor force entrants. With the jobs market holding up for now and inflation looking a little stickier of late, Fed officials over the inter-meeting period seem to largely be on the same page as Governor Waller when it comes to the near-term prospect of rate cuts: "What's the rush?"
Since the Committee last met, the U.S. inflation data have come in a bit stronger than expected, while the labor market generally has remained resilient. With payroll growth still solid and inflation proving to be a bit stickier recently, we suspect the FOMC will still be seeking greater confidence at the end of its meeting next week that inflation is headed back to 2% on a durable basis.
That said, beneath the robust headline figures, we see building evidence that the labor market is cooling and inflation is still slowing on trend. Chair Powell testified to Congress shortly before the March blackout period that the Committee is "not far" from the confidence needed to dial back the level of policy restriction.
We now expect the FOMC will initiate the first cut to the federal funds rate at its June 12 meeting (our previous expectation was at the May 1 meeting). We look for 100 bps of easing in total this year and another 100 bps of easing over the course of 2025 to bring the fed funds target range to 3.25%-3.50% by year-end 2025.
In light of the recent slate of data and Fed-speak, we see few changes to the post-meeting statement after a meaningful rework following the January meeting.
The March meeting will include an update to the Committee's Summary of Economic Projections (SEP). We do not expect material changes to the median projections for real GDP growth and the unemployment rate.
The story is similar for inflation. Our most recent forecast projects headline and core PCE inflation of 2.3% and 2.5%, respectively, in 2024. The Committee's median projection in the December SEP was 2.4% for both headline and core PCE, suggesting that the current outlook is not materially different from December for most FOMC members. We think the core PCE inflation median for 2024 will rise by a tenth or so, putting it closer to the midpoint of the central tendency range from December.
That said, even if the magnitude of the changes to the outlook for growth and inflation are relatively small, the direction of the revisions likely will be toward a hotter outlook, i.e. faster growth, and higher inflation. Will the dots follow suit?
Our base case is that the median dot for 2024 will remain unchanged at 4.625%, but the risks are skewed toward a higher median given the distribution of the prior dots and the recent run of inflation data. Similarly, we expect no change to the 2025 and 2026 median dots, though here too we think the risks are skewed to the upside.
A slowdown in the pace of the Fed's balance sheet runoff program also appears to be coming closer into view, and the Committee is likely to have a broad discussion of the central bank's plan for quantitative tightening (QT) at the March meeting.
Our base case remains that the FOMC will announce a plan to slow the pace of QT at its June meeting, although we would not be shocked if the Committee decided to do so one meeting earlier or later. Specifically, we expect the runoff caps for Treasury securities to be reduced to $30 billion while MBS caps are dropped to $20 billion starting on July 1. We anticipate this slower pace of QT running until year-end 2024.
A little more conversation, but still no action
We do not expect any policy changes from the FOMC at its meeting next week, but the Committee's post-meeting communications should shed more light on the potential path of policy adjustments later this year. The prospects of the first rate cut occurring on March 20 initially started to slip away at the end of the Committee's last meeting on January 31. In the post-meeting press conference, Chair Powell shared that "I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that." Since then, generally stronger-than-expected data and the string of Fed officials indicating they are in no big rush to ease policy have driven down the odds of a rate cut at next week's meeting to essentially nil. Expectations that a rate cut could first come at the May 1 meeting have also been pared back (Figure 1).
The tempered expectations for rate cuts follows a pickup in inflation to start the year. After the 6-month annualized rate of change in the core PCE deflator slowed to below 2% in the second half of last year, a hot print at the start of 2024 pushed this rate back up to 2.5% in January (Figure 2). The Consumer Price Index, which includes data through February, shows core inflation running at a 4.2% annualized rate the past three months compared to the 3.3% clip at the time of the FOMC's past meeting.
Job growth has also held up well in recent months. In February, nonfarm payrolls again surpassed consensus expectations, and the three-month average pace of 265K remains well above the ~100K pace that we estimate is currently needed to absorb labor force entrants. With the jobs market holding up for now and inflation looking a little stickier of late, Fed officials over the inter-meeting period seem to largely be on the same page as Governor Waller when it comes to the near-term prospect of rate cuts: "What's the rush?"
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