New Federal Reserve rate-cut projections show that policymakers still expect three quarter-point rate cuts this year, despite the recent uptick in inflation and the surging stock market. After release of the updated Fed rate-cut outlook, the S&P 500 moved modestly higher initially, then gained more ground as Fed chair Jerome Powell spoke.
Fed Chair Powell On QT
Powell's news conference began much like the one in January, suggesting this was mostly a status-quo meeting.
Powell repeated that the initial Fed rate cut is likely "at some point this year," if the economy develops as expected. He added that an "unexpected weakening in the labor market could warrant a policy response."
In discussing the Fed's balance sheet, Powell said securities holdings have fallen by nearly $1.5 trillion. He said that the Fed's policy-setting committee didn't make any change to the current run-off of mortgage and Treasury securities as they mature, but said there's broad agreement it "will be appropriate to slow the pace of run-off fairly soon."
Bumpy Road For Inflation
Hot inflation data in January and February showed that there was a bumpy road to 2% inflation, but the Fed won't overreact to the bad data, Powell said.
"We don't know if this is a bump in the road or something more," Powell said. Later, he added that the recent data did provide more reason for the Fed to take its time before deciding a rate cut is appropriate.
Still, Powell seemed to indicate that the Fed has made enough progress that he's keeping a glass-half-full mindset.
Powell was asked about easy financial conditions, with various measures showing the easiest conditions since before the Fed began hiking in March 2022. The S&P 500 rally is a key reason behind easy financial conditions.
But Powell seemed to downplay the economic relevance of financial conditions gauges. The Fed chair said he believed that financial conditions were "weighing on" the labor market, easing imbalances between supply and demand. He may have been thinking of the high cost of credit, particularly for small businesses.
Still, Powell said he didn't see any cracks forming in the labor market.
"The labor market's in good shape."
Fed Rate-Cut Projections
The new projections indicate an expectation of 75 basis points in rate cuts this year, unchanged from December. That would leave the target range for the federal funds rate, the Fed's benchmark interest rate, between 4.5% and 4.75% at the end of 2024.
Below the surface, Fed policymakers did get a touch more hawkish from December to March. In December, 11 Fed policymakers saw three or more rate cuts in 2024, while eight saw two cuts or fewer. Now the split is 10-9 forecasting at least three rate cuts, meaning it's a flimsy majority. However, it's a good bet that Fed chair Powell is holding that majority together.
Fed policymakers did trim their expectation for rate cuts in 2025. They now expect three quarter-point rate cuts, down from four in December projections. Still, the Fed's key rate would fall to a range of 3.75% to 4% by the end of 2025.
The Fed also bumped up its view of the long-term neutral interest rate to 2.6% from 2.5%.
The expectation of three rate cuts this year comes despite hot inflation data for January and February. The Fed now expects its primary inflation measure, the core PCE price index, to rise 2.6% from a year ago in Q4, up from a projected 2.4% increase in December.
GDP is now expected to grow 2.1% this year, up from December's view of 1.4%.
Fed Rate-Cuts Odds
After today's Fed policy update, markets were pricing in 75% odds of a quarter-point rate cut by the June 12 Fed meeting, up from 65% before the new rate-cut outlook. Markets are pricing in a year-end 2024 federal funds rate of 4.56%, down from 4.64%. The odds build in a 75% chance of at least three quarter-point rate cuts.
S&P 500
After the 2 p.m. release of the updated Fed rate-cut outlook, the S&P 500 rose 0.9% in Wednesday stock market action to a record high.
The 10-year Treasury yield dipped three basis points to 4.27%, while the 2-year Treasury yield tumbled 9 basis points to 4.6%.
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