Meeting the markets halfway
The Fed now projects rate cuts in 2024, just not as many as the markets have.
A surprisingly docile Jerome Powell made an appearance at today’s Federal Reserve policy-setting meeting. Despite a dovish post-meeting statement and dot plot, past Fed playbooks would have called for the Chair to push back on market perception of an easier Fed. But that was not the case. Powell said a number of times that monetary policy likely was at or near its peak and acknowledged the committee had even explored when it may be appropriate to ease. That corroborated the median fed funds forecast in the Summary of Economic Projections that implied more rate cuts than projected in September, including 75 basis points in 2024. This marked the third straight FOMC meeting in which policymakers decided to leave the policy rate unchanged at a target range of 5.25-5.50%, and we think in all likelihood the Fed reached the terminal rate at the end of July.
Although we had expected Powell to push back on easing expectations, we didn’t think he would be successful in his efforts as the market has been leaning heavily towards a reversal in policy early next year. Maybe that’s why he didn’t even try. He acknowledged the improvement in inflation and the signs of rebalancing in the labor markets. Or perhaps he figured the markets would see the cuts suggested in the dot plot and draw its own conclusion regardless.
There was some intrigue, however: a small but significant change in the statement’s language. The Fed added the word “any” to this sentence: “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account…” In his press conference, Powell acknowledged this was an intentional add to reflect the shifting Fed mindset.
There were notable changes in the Summary of Economic Projections as well, including in the new dot plot. Although the committee’s views on economic growth and unemployment for 2024 and beyond remained little changed, the forecast for inflation revealed an expectation of faster progress towards the Fed’s 2% inflation target. The Fed kept the administered rates and reduction of the balance sheet unchanged.
On balance, while we still believe that the Fed will remain on hold for longer than the market is pricing, the probability of easing in the second half of 2024 has risen.