After a cooler-than-expected inflation report helped stocks rise Wednesday morning, all eyes turned to the Federal Reserve for its long-awaited interest rate decision.
At the June Federal Open Market Committee (FOMC) meeting, the central bank decided to keep interest rates stable, a move widely expected on Wall Street. But the new “scatter plot,” which plots FOMC officials’ interest rate forecasts for each of the next three years on a matrix grid, showed the average forecast of just one interest rate cut in 2024, down from three in March. The Fed is also forecasting slightly higher inflation, and to cut rates, Fed Chairman Jerome Powell said he needs to see “more good data” showing that inflation is indeed under control.
But investors don’t seem too spooked by the Fed’s hawkish change in outlook, in part because many forecasters already have fewer than three rate cuts planned for this year. The Dow Jones Industrial Average fell just 0.09% on Wednesday, while the S&P 500 rose 0.85% and the tech-heavy Nasdaq rose 1.53%.
“Don’t read too much into today’s FOMC dot plot,” said Ronald Temple, chief market strategist at Lazard. Luck by email. “As additional inflation and labor reports over the summer confirm that price pressures are easing and labor market tensions are easing, I expect FOMC members to once again revise their forecasts to include even more rate cuts by the end of the year.”
David Russell, head of global market strategy at TradeStation, echoed this view. “This is a Fed meeting without hamburgers,” he said. Luck by email. “They know conditions are improving, but they don’t need to rush to cut rates… Goldilocks is emerging, but politicians don’t want to jinx it.”
According to Russell and Temple, the Fed’s latest meeting may not have been as hawkish as the scatter plots suggest. The only major change to the monetary policy statement that accompanies the Fed’s rate outlook was the replacement of the words “none” with “modest” before discussing further progress toward the Fed’s 2% inflation target, for example. and Powell told reporters At his follow-up news conference, he said that “we’ve made pretty good progress in fighting inflation,” noting that Wednesday’s CPI report was “encouraging.”
The Fed also continues to forecast significant interest rate cuts over the next three years. Officials expect the Fed funds rate to fall from 5.1% in 2024 to 4.1% in 2025 and then to 3.1% in 2026. These forecasts, as always, are subject to change, but they indicate that the Fed has not changed the situation. it’s a totally dovey look.
The bond market is still pricing in a 60% chance of a rate cut in September, according to Fed futures contracts compiled by CME’s FedWatch tool. That’s below the 70% peak seen after Wednesday morning’s tepid inflation report, but 10 percentage points above Tuesday’s reading.
In a conciliatory moment, Powell also hinted that recent strong employment numbers may be a bit “overstated,” brushing aside concerns among some experts about robust wage growth driven by a strong labor market leading to persistent inflation.
“We’re seeing a gradual cooling, a gradual movement toward better balance,” Powell said, adding that it’s still “a very strong labor market, but not the overheated labor market that we had two years ago or even a year ago.”
Another reason markets may be discounting the Fed’s hawkish dot plot is the discrepancy between Fed officials’ interest rate forecasts. While seven officials predict one rate cut this year, four expect no rate cuts (up from two in March) and eight expect two cuts.
Overall, professional investors and economists alike seem to view the latest Fed meeting as little more than a reiteration of the largely dovish but staunchly data-driven stance of central bank officials, which promises that they will adapt to new data and will retain flexibility in making political decisions. .
“The Fed laid out its decision-making process quite clearly at today’s meeting, and its policymakers are responding to incoming data in accordance with that process,” said Bill Adams, chief economist at Comerica Bank. Luck by email. “If inflation continues to decline as it has over the past year and a half, the Fed will begin cutting interest rates in the second half of 2024.”
Finally, while Wall Street will undoubtedly continue to agonize over the Fed’s outlook and tone at future meetings, Powell hinted that the investor class may be reading too far into small potential changes in interest rates.
“If you look back in five or 10 years and try to estimate what one 25 basis point cut would mean to the U.S. economy, you’ll have your work cut out for you,” he said.