United States: Fed keeps rates unchanged in March
At the meeting ending on 20 March, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate at 5.25%–5.50% for the fifth straight meeting, as expected by markets.
The decision was likely driven by the Fed’s desire to assess the impact of past rate hikes, which total 525 basis points since early 2022. Inflation roughly halved in the twelve months to February, meaning there was no need to continue hiking. On the flipside, it was premature to begin monetary easing given that both headline and core inflation are still above the Fed’s 2.0% target range and that headline inflation overshot market expectations in January and February.
Looking ahead, the Fed’s March projections were for the midpoint of its federal funds rate range to end 2024 at 4.6%, in line with the projections the Bank made in December 2023. This is only slightly above the forecasts of our panelists, which are for the upper bound of the federal funds rate range to be around 4.6% by end-2024. Virtually all our panelists expect rate cuts to begin in Q2 or Q3.
On the outlook, United Overseas Bank’s Alvin Liew said:
“We […] expect the Fed to maintain its current FFTR at 5.25-5.50% through mid-2024 where we price in 75bps of rate cuts for 2024 (i.e. three 25-bps cuts, one each in Jun 2024, 3Q24 and 4Q24 respectively). We now expect the Fed to announce changes to the pace of its QT programme in the 1 May FOMC, likely to slow the pace of the monthly reduction of US Treasuries to US$30bn (from US$60bn currently) and mortgage-back securities (MBS) to US$20bn (from US$35bn currently).”
In contrast, Nomura analysts said:
“We maintain our expectation of just two rate cuts this year, in July and December. The dot distribution suggests the FOMC is divided between two and three cuts this year, and policymakers are likely to be sensitive to upside surprises in inflation data.”