Fed Watch - Still on track for June rate cut

FOMC still expects three rate cuts in 2024, but a bit less in 2025-26

Most notably, the Committee still expects three 25bp rate cuts this year – as we had flagged in our preview, though there was some expectation in the market that the number of rate cuts projected would decline. This caused markets to price in a somewhat higher probability of a June rate cut (with a 25bp cut now around 80% priced vs 65% pre-FOMC). The Committee does however now expect one less rate cut in 2025, leaving the fed funds rate somewhat higher at the end of the forecast horizon (3.1% in 2026 vs 2.9% in December). GDP forecasts were raised, with the median committee member now no longer forecasting any slowdown. Growth is instead expected to be stable near trend at around 2% throughout the horizon to 2026. Near-term core inflation forecasts were raised slightly (core PCE in 2024 is now at 2.6% vs 2.4% in December), but the medium term outlook continued to be for inflation to fall sustainably back to 2%. All told, it is a very goldilocks-like outlook, and not dramatically different to our own view (we do continue to expect a more meaningful near-term growth slowdown).

Powell still the cautious hawk; avoids specific forward guidance

In the press conference, Chair Powell was clearly in a holding pattern, and avoided saying anything that would trigger big moves in financial markets. He acknowledged the firmness of recent inflation readings, and while he said we needed to be careful not to dismiss “data we don’t like,” he pointed to potential residual seasonality in the data, with inflation earlier in the year having the tendency to be higher than later in the year. He summed up the Fed’s assessment of recent inflation data as: it doesn’t add to confidence in the disinflation trend, but the broad narrative of inflation returning to 2% with occasional ‘bumps in the road’ remains unchanged. Powell pointed to the risks around the outlook being ‘two-sided’, and said an ‘unexpected’ weakening in the labour market could warrant its own response. The FOMC already has a modest rise in unemployment in its forecast, so an unexpected weakening would be something that goes meaningfully (or suddenly) beyond that. Finally, unlike ECB President Lagarde earlier this month, Powell would not be pinned down on the likely start of cuts. One reporter attempted to tease this out of Powell by asking whether there would be enough data by May, or June to make a decision, but his responses stayed neutral. We continue to think the Fed will have enough data by June to begin cutting rates.

QT slowdown likely to be announced in May

Powell also gave an update on the future of quantitative tightening. He said the Fed would announce a decision on a slowdown in QT ‘fairly soon’, which we take to mean the 30 April – 1 May FOMC meeting. Powell’s remarks also suggested that a slowdown in QT would not necessarily mean an end to it – or at least, that the Committee will most likely not communicate an end date at this point. Instead, by slowing the pace of QT, the FOMC would be able to better assess the impact on money market conditions over time, and end the run-off once it saw signs that reserves were ‘ample’ as opposed to ‘abundant’ (the word Powell used to describe reserves at present). Assuming the Fed slows the pace of QT from the second half of 2024, for instance by halving the current caps in place, we think the Fed will reach the point at which it ends the run-off entirely by early 2025. See our previous note on this for more background.