Please see below, an article from Evelyn Partners explaining the implications for markets of the latest Federal Open Market Committee meeting and rate decision. Received last night – 20/03/2024
What happened?
The Federal Open Market Committee voted unanimously to keep rates on hold at 5.5% (upper bound) at the conclusion of their meeting today. This was in line with market expectations and is the fifth consecutive meeting where rates have been held at the same level since the last increase in July 2023.
The Fed also today released its quarterly ‘dot plot’ which tells markets where committee members see interest rates going in the future. It showed no change from their December publication in terms of median rate expectations for the end of 2024 at 4.6%, suggesting 75bps of cuts from current levels. Importantly, it did show revised expectations for where rates will be at the end of 2025 at 3.9%, suggesting one less cut than their estimate in December.
What does it mean?
No change in rates at today’s meeting came as no surprise to financial markets, which were pricing the chances of a cut at less than 1% going into the meeting. There were no significant changes in the wording of the statement today, and the ‘dots’ revealed fewer rate cuts to come but with one taken from 2025, rather than 2024 as some analysts had been speculating. Officials also increased forecasts of where they see rates settling over the long term, increasing their median estimate from 2.5% to 2.6%.
Interest rate expectations have moved a long way since the Fed’s last meeting on the 31 January. Immediately following that meeting, futures markets were pricing in six interest rate cuts over the course of 2024, while their ‘dot plot’ (which was published in December) was suggesting there would be only three. Since then, markets have slowly fallen into line with Fed thinking, with the latest market estimation for the number of rate cuts this year also being three, immediately before today’s meeting. That was largely thanks to month-on-month core CPI inflation prints for both January and February coming in 10 basis points higher than market expectations – stickier than expected. Producer Price Index inflation readings (a price measure at the wholesale level) have also come in hotter than expected, leading to bond market inflation expectations to move from around 2.2% (CPI) annually for the next 5 years to around 2.4%. Interestingly, the Fed’s preferred measure of inflation, the PCE deflator was not stronger than expected, with the headline measure for January coming in at 2.4%. This inflationary backdrop led the Fed to increase their estimates today for PCE inflation to 2.6% from 2.4% by the end of the year.
On the growth side of the equation, payroll gains have been strong in January and February although unemployment ticked up to a 2 year high of 3.9%. Q1 GDP is tracking close to 2% after the remarkable strong 4% seen in the second half of last year – lower but still above the long run rate.
This varied economic backdrop led the committee to repeat the guidance in the previous statement that it doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Officials maintained the pace of quantitative tightening, with a maximum of $60 billion of Treasuries and $35 billion of mortgage-backed securities rolling off the balance sheet each month, and no guidance of any changes to this.
Bottom Line
There weren’t many surprises out of today’s Fed meeting, and therefore market expectations (and our own) for interest rates have not changed. The equity market hasn’t been put off its stride by the prior moderation in cut expectations in quite the same way that the bond market has, but with futures markets finally in line with the fed, we would expect one source of volatility, particularly for the bond market, to dissipate. Clearer visibility over cuts should be a more benign backdrop for positive performance from both equity and bond markets.
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Alex Kitteringham
21st March 2024