The dots are the point
The Fed's dot plot held the intrigue at the FOMC meeting.
Today’s FOMC meeting was largely a nonevent overall, but with a few interesting details. The Fed kept the fed funds target range unchanged at 5.25-5.5%, which Chair Jerome Powell acknowledged as likely the peak rate for this cycle and the FOMC statement had few changes. In his press conference, Powell emphasized they believe inflation is on a sustainable, though bumpy, path back to 2%, and they need additional confidence from the data before moving to a less restrictive policy. Powell’s communications were balanced, consistent with our outlook for easing by the Fed starting in the June/July time frame.
The “interesting” bits came in the minutiae that are the infamous dots. At 4.6%, the median dot remained the same as it had in December. That said, it was a close call. Just two participants needed to shift their views to move it, but just one did. However, the projections for 2025 and 2026 rose incrementally (from 3.6% and 2.9% to 3.9% and 3.1%, respectively). And somewhat surprisingly the long-run dot did as well, from 2.5% to 2.6%—the first time this projection changed since early 2019. The Fed may be acknowledging that the neutral fed funds rate, at which monetary policy is neither restrictive nor accommodative, is a little higher than previously thought. Definitely something to keep an eye on.
As for the remaining and the Summary of Economic Projections contents, they reflected slight upticks to growth and inflation projections, but still consistent with a picture of inflation eventually moving back to 2% amid solid 2% economic growth, the “soft landing” holy grail.
As promised, quantitative tightening was a major topic of discussion during the meeting. Powell said the Fed would taper the pace of the balance sheet runoff “fairly soon,” which in Fedspeak translates to as early as the May FOMC meeting. Unprompted, he made the point slowing the pace might allow the Fed to get to a lower balance sheet. He also commented that the Fed would be watching money market conditions as one means of judging if bank reserves are declining too much as the balance sheet continues to shrink.