March 31, 2024

     A healthy labor market and sticky inflation data reinforced the Fed’s willingness to be patient and cautious while waiting for more evidence that inflation is on a sustainable path toward its 2% goal. Elevated uncertainty due to inclement weather and seasonal adjustments introducing noise in the data was likely also a factor in the Federal Open Market Committee (FOMC) unanimously electing to hold policy rates steady at 5.25% to 5.50% at the March 20^th meeting. The only change to the policy statement from the prior one was to a phrase from “Job gains have moderated since early last year but remain strong” to “Job gains have remained strong.”
  

     The Summary of Economic Projections (SEP), released at the same time as the policy statement, did have some interesting changes. The Committee’s projections for the economy reflected continued resilience in both activity and price growth. The median projection for real GDP growth in 2024 is 2.1%, up from 1.4% on The December SEP. Growth projections for 2025 and 2026 were also revised up. The Committee’s inflation projections also rose modestly, most notably an increase in the median projection for 2024 core PCE inflation from 2.4% to 2.6%.

     The SEP, specifically the “dot plot,” showed that the Committee continues to believe that some policy easing will be appropriate. The FOMC continued to pencil in 3 rate cuts this year, with the median remaining at 4.625% for year-end 2024. The distribution, however, changed with 9 of the 19 dots projecting 2 rate cuts or less. The dots for the out years showed a broadly upward movement, with March’s median projection shifting up by 25 basis points from December’s medians. The longer-run projected fed funds rate was also nudged slightly higher. The longer-run represents the Committee’s estimation of the level of the federal funds rate that would be more consistent with achieving the Federal Reserve’s dual mandate of maximum employment and stable prices.

    While the Summary of Economic Projections leaned slightly hawkish, the post-meeting press conference by Fed Chairman Powell was characterized as leaning dovish. He implied that the economy faces growth headwinds and even if hiring remains strong it would not delay rate cuts. What was unexpected were Chair Powell’s repeated references to the risk that a rapid softening of the labor market could provoke a more rapid decline in policy rates. Powell was dismissive of hotter-than-expected inflation reports as they “haven’t changed the overall story which is that of inflation moving down gradually on a bumpy road, towards 2%.”




    The bottom line is that even with the bump in projected inflation, the Fed is biased toward easing policy. In trying to risk manage; Committee members may be putting a little more weight on the risk of keeping policy restrictive too long and being blamed for sinking the economy, versus easing prematurely. The next FOMC meeting will occur April 30-May 1, when the Fed will have seen just one more set of inflation data, the data for March. That is not likely to provide enough evidence to convince the Committee that inflation is sustainably headed lower. That confidence is now expected to be achieved later than previously thought.