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The Fed Is Ready to Pivot: Minimum Three Cuts This Year, Preparation to Slow Balance Sheet Runoff

AInvestWednesday, Mar 20, 2024 11:15 pm ET
2min read

The Fed held its rates steady on Wednesday as expected, but evidence of its dovish stance significantly boosted the market. Powell reiterated that rates may have reached their peak and that it might be timely for some easing in monetary policy later this year. The majority of committee members maintain the expectation of three rate cuts this year, aligning with the outlook in January and challenging the market's hawkish prediction of two cuts.

Monetary easing prospects propelled stock indices to reach record closing highs, with S&P 500 surpassing the 5,200 mark and gold exceeding $2,200 per ounce for the first time.

The wording of the Fed's statement mirrored its January version closely. Stated topics included ongoing robust economic activity, low unemployment rates, easing of inflation (although it remained high over the past year), and adherence to a 2% target, amongst others. The only minor difference was the job growth description, which was left as remains strong. Evidently, the Fed's policy outlook assessment hasn't changed considerably since January, and remains unaffected, displaying a dovish character, even by the slightly rebounded inflation data from the past two months.

In the released dot plots, the Fed sustained its expectation of three 25 basis point cuts for the year. Post rise in inflation, however, policymakers downsized their estimation of the number of rate cuts for 2025. The median projection for the 2025 rate escalated by 30 basis points to 3.9% from December's 3.6% rate; the median estimate for the 2026 rate is now 3.1%, up from the previous 2.9%; the long-term rate forecast has risen slightly to 2.6%.

Out of 19 voting members this round, while 9 anticipate two or fewer rate cuts this year (up from 5 in December), the remaining 10 believe that the year should see at least 3 rate cuts.

These anticipated actions stem from the Fed's optimistic short-term economic growth outlook. With the GDP predicted to grow by 2.1% in 2024, a considerable rise from December's 1.4%, the projections for 2025, 2026, and long-term GDP growth stand at 2%, 2%, and 1.8%, respectively, a marginal rise from the previous 1.8%, 1.9%, and 1.8% forecasts.

The Fed's inflation expectations experienced a slight increase as well, with their 2024 core PCE forecast rising to 2.6% from December's 2.4%, while the projections for 2025 and 2026 remain at 2.2% and 2%.

Chair Jerome Powell confirmed that there are plans for upcoming cuts, without specifying a timeline. We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year, Powell commented at his post-meeting news conference. We are prepared to maintain the current target range for the federal funds rate for a longer duration if necessary.

He also emphasized that strong job growth alone is not cause for concern over inflation.

In addition, Powell noted on Wednesday that it soon may be fitting to slow the pace of the balance sheet run-off. In transitioning towards a taper of the drawdown, the central bank may be able to shed more bonds than previously anticipated. It will be appropriate to slow the pace of run-off fairly soon, he said, without specifying a timeline and only mentioning that this issue is currently under debate.

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