The Federal Reserve on Wednesday kept interest rates steady as expected and signaled it still plans multiple cuts through the end of the year.
After a two-day policy meeting, the central bank’s Federal Open Market Committee said it would keep its benchmark overnight borrowing rate in the range of 5.25%-5.5%, where it has been since July 2023.
Along with the decision, Fed officials targeted three quarter-percentage-point cuts by the end of 2024, the first cuts since the early days of the Covid pandemic in March 2020.
The current level of federal funds rates is the highest in more than 23 years. The rate determines the amount banks charge each other for overnight lending, but affects many forms of consumer debt.
The outlook for the three cuts was based on the Fed’s “dot plot,” a closely watched matrix of anonymous forecasts from the 19 officials who make up the FOMC. The schedule does not provide any indication of travel times.
Chairman Jerome Powell said the Fed also did not specify a timeline, but said he still expects cuts to happen if the data is accurate. After the meeting, futures markets were forecasting a nearly 75% chance that the first cut would occur at the June 11-12 meeting, according to the CME group’s FedWatch indicator.
“We believe that our interest rate is likely at its peak for this type of cycle, and that if the overall economy performs as expected, it will likely be appropriate to begin easing policy restrictions at some point this year.” , Powell said at his hearing. press conference after the meeting. “We are prepared to maintain the current target range for the federal funds rate longer if it is practical to do so.”
The chart shows three cuts in 2025, one less than the last time the grid was updated in December. The committee expects three more cuts in 2026, and then two more in the future, until the federal funds rate settles at about 2.6%, which policymakers estimate is a “neutral rate” that is neither stimulative nor restrictive.
The grid is part of the Fed’s Summary of Economic Outlooks, which also provides estimates of gross domestic product, inflation and unemployment. The mix of locations has changed somewhat since December in terms of deviations from the median, but not enough to change this year’s forecasts.
Markets rose after the publication of the FOMC decision. The Dow Jones Industrial Average ended the session up 401 points, or just over 1%. Treasury yields were mostly lower, with the 10-year yield last at 4.28%, down 0.01 percentage point.
“The overall takeaway from the ‘no news is good news’ press conference is that markets continue to get the green light to move higher,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “We are not surprised to see that the initial reaction from investors will be higher stock prices, and we expect this to continue until some new shock hits the system because the Fed is not going to stand in the way of a bull market.” .
Raises GDP forecast
Officials have sharply accelerated their forecasts for GDP growth this year and now see the economy operating at an annualized rate of 2.1%, up from an estimate of 1.4% in December. The unemployment rate forecast fell slightly from the previous estimate to 4%, while the forecast for core inflation, as measured by personal consumption expenditures, rose to 2.6%, up 0.2 percentage points from the previous level but slightly below the latest level of 2.8%. The unemployment rate in February was 3.9%.
The GDP outlook also gradually improved over the next two years. Core PCE inflation is expected to return to target by 2026, the same as in December.
The FOMC’s post-meeting statement was nearly identical to the statement it made at its last meeting in January, except for raising its job growth estimate to “strong” from its January assessment of “moderate” growth. The decision to maintain the rates was made unanimously.
Markets were closely watching for clues about where the Fed would move next with monetary policy.
Earlier this year, traders in the fed funds futures market praised the likelihood that the central bank would begin cutting rates at this week’s meeting and would continue to do so until it had made seven cuts by the end of the year. However, recent events have radically changed this view.
Better-than-expected inflation data early in 2024 prompted caution among senior Fed officials, and the January FOMC meeting ended with the central bank saying it needed more evidence of a slowdown in prices before it had “greater confidence” in inflation and will begin to reduce it.
Since then, statements from Powell and other policymakers have reinforced sentiments of a patient, data-driven approach, and markets have been forced to reconsider prices. Powell and his colleagues noted that with the economy still growing at a healthy pace and the unemployment rate below 4%, they could take a more measured approach in easing monetary policy.
“The economy is strong, inflation has come down significantly,” Powell said, “and that gives us the opportunity to take a careful look at this issue and feel more confident that inflation is on a steady path to 2% when we take that step to start coming down.” . our restrictive policy.”
The first cut is expected to come in June, followed by two more, bringing markets and Fed officials back into line.
In addition, markets were also looking for some direction in the Fed’s balance sheet reduction program.
Under a process that began in June 2022, the central bank is allowing up to $60 billion a month in proceeds from maturing Treasury bonds, as well as up to $35 billion in mortgage-backed securities, to be dumped rather than reinvested. This process is often called “quantitative tightening” and has led to a reduction in Fed assets by approximately $1.4 trillion.
Powell confirmed that the issue was discussed at the meeting, but noted that no decisions had been made on the size or timing of a potential balance sheet reduction.
“While we have not made any decisions today, the overall view of the committee is that it would be appropriate to slow down the pace of the second round fairly soon in accordance with the plans we had previously developed,” he said.