FOMC Meeting Preview: Will The Upcoming 'Dot Plot' Hold The Answer To Future Rate Cuts?
As nearly two months have passed, we are on the verge of another FOMC meeting. Compared to the previous meeting, one thing we know for sure is this time, the much-anticipated rate cut is certainly off the table.
Since the interest rate meeting at the end of January, macroeconomic figures, such as CPI and non-farm employment, have beaten expectations one after another, thus extinguishing the vanishing hopes and enthusiasm the market had for an interest rate cut this month. Almost everyone has accepted the reality that the rate will continue to hover between 5.25% and 5.5% this month. Many are even beginning to wonder if there will be more than three rate cuts this year.
But regarding this question, the dot plot to be released in the upcoming meeting might just hold the answer.
The Dot-Pot Could Reveal Some Clue?
While those Fed officials are often chatterboxes in front of the media, it is the dot plot alone that represents their real interest rate expectations and their true thoughts.
The last time this table was updated in December, the dots indicated three interest rate cuts for 2024, four for 2025, and three for 2026. After two more cuts sometime after 2026, the long-term federal fund rate will be cut to approximately the neutral level of 2.5%, a level that neither overheats the economy nor puts it out.
However, the collective voice at the Federal Reserve seems to be shifting with the entrance of those like Raphael Bostic who firmly oppose cutting interest. For example, the Federal Reserve Bank of Minneapolis President Neel Kashkari has expressed that he is considering reducing his 2024 interest rate expectation from two cuts to one.
Some economists of J.P. Morgan even forecasted that, due to sustained price pressure or stronger productivity, Fed policymakers may raise their expectations for the long-term federal fund rate at this meeting. Any increase in expectation implies that future interest rates will maintain a higher level.
Citigroup economist Andrew Hollenhorst also noted in a briefing to clients, Doing the math, it only takes two individual dots moving higher to raise the 2024 median. Three dots are enough to push the long-run dot 25bp higher.
But the combination of inconclusive activity data and slowing year-on-year core inflation should be just enough to keep dots in place and [Fed Chair Jerome] Powell still guiding that the committee is on track to gain 'greater confidence' to cut policy rates this year, the economist added.
Economist Anna Wong also expressed: The dot plot will show the median FOMC participant still expects 75 basis points of rate cuts this year. Given Powell's past sensitivity to signs of slowing activity - which is still the case in recent weeks despite hot inflation prints - he could surprise on the dovish side at the news conference.
What's The U.S. economy Like In The Eyes Of The Fed?
In addition to the 'dot plot,' the Fed is also going to release its latest quarterly outlook on U.S. economic conditions, including updates on U.S. GDP, inflation, and unemployment rates. These overall estimations are referred to as the Summary of Economic Projections (SEP).
From the perspective of industry insiders, it's unlikely that the Fed will make major adjustments to the economic outlook.
Economist at Bank of America, Michael Gapen, wrote, While inflation has hit a bump in the road, the activity data suggest the economy is not overheating. As such, most economists believe that the Fed is most likely to upgrade its forecast for U.S. GDP once again, while possibly marginally adjusting inflation forecasts higher.
Moreover, with the recent unemployment rate reaching a two-year high, the Fed may also make a statement on this scenario, using phrases like the unemployment rate has edged higher, but remains low.
Balance Sheet Reduction Process
At this meeting, the Fed is expected to continue its discussions concerning its $7.5 trillion balance sheet, but there's not much likelihood for a resolution on slackening the pace of balance sheet reduction to be made. Most economists believe that it won't be until June before the Fed makes a related decision and the actual 'slow down' won't start until June or July. They forecast that by December 2025, the Fed's balance sheet size will reduce to $6.7 trillion.
Of note is that the Fed's balance sheet reduction process does not only concern Wall Street, but also central banks worldwide.
Though there is no official statement, most central banks in the world currently tend to follow the pace of the Fed. However, higher interest rates tend to put upward pressure on currencies and raise prices for some goods and services. Therefore, as the growth concerns escalate in some parts of the world, central banks are also hoping for the Fed to promptly release some signal.
Moody's economist Zandi stated, The rest of the world is waiting for the Fed. They would prefer not to have their currencies fall in value and put further upward pressure on inflation. So they would really, really like the Fed to start leading the way.