Fed Holds Rates, Signals More Rate Cuts in 2024

The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 5.25% to 5.50% range and announced it would continue its balance sheet runoff.

The Fed adjusted its language to acknowledge the recent easing in economic data, stating “recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

The Fed’s Summary of Economic Projections was updated from September:

• The median projection for real GDP growth was upgraded overall to 2.6% in 2023, 1.4% in 2024, 1.8% in 2025, 1.9% in 2026, and 1.8% over the long run.
• The median unemployment rate forecast for 2023, 2024, 2025, 2026, and the longer run came in at 3.8%, 4.1%, 4.1%, 4.1%, and 4.1% (from 3.8%, 4.1%, 4.1%, 4.0%, and 4.0%), respectively.
• On inflation, the median estimate for core PCE was assumed to be 3.2% in 2023, 2.4% in 2024, 2.2% in 2025, and 2.0% in 2026.
• The median projection for the fed funds rate was 4.6% in 2024, 3.6% in 2025, and 2.9% in 2026. The long-run neutral rate was assumed to be 2.5%.

All of the members of the FOMC voted in favor of the decision.

Key Implications

Everyone was watching for how the Fed would adjust its economic and interest rate forecast in the wake of cooling economic data. Recent readings have started to weaken alongside a quicker than anticipated deceleration in inflation. The Fed’s outlook for a perfect landing – a marginal increase in the unemployment rate and inflation coming down to target – has been sped up in its updated forecast today. Importantly, this means that the median Fed voter is anticipating that the policy rate will be 50 basis points lower by the end of 2024 than it was previously expecting (4.6% vs 5.1%).

While FOMC members are increasingly moving forward the start of rate cuts, markets are a few steps ahead. The Fed’s forecast implies that rate cuts would start in the fall of 2024 (assuming 25 bps cuts in consecutive meetings), while market odds are pointing to cuts happening in the spring. We are in the middle of these two views. While we think that cuts should come earlier than the Fed foresees, it will take more time for the economy to cool enough to justify a cut in early May. Either way, markets are cheering the shift in the Fed view, with both equities and bonds rallying post-announcement.