Fed stands pat on rates and view on 2024 cuts, in face of elevated inflation
(Reuters) - The Federal Reserve held interest rates steady on Wednesday, but policymakers indicated they still expect to reduce them by three-quarters of a percentage point by the end of 2024 despite stodgier expected progress towards the U.S. central bank's 2% inflation target.
The Fed's new policy statement described inflation as remaining "elevated," and updated quarterly economic projections showed the personal consumption expenditures price index excluding food and energy rising at a 2.6% rate by the end of the year, compared to 2.4% in the projections issued in December.
MARKET REACTION:
STOCKS: The S&P 500 turned 0.65% higher
BONDS: The yield on benchmark U.S. 10-year notes fell 2.1 basis points to 4.275%. The 2-year note yield, which typically moves in step with interest rate expectations, fell 7.9 basis points to 4.6129%,
FOREX: The dollar index fell 0.45%, with the euro up 0.51%
COMMENTS:
SAM MILLETTE, DIRECTOR FIXED INCOME, COMMONWEALTH FINANCIAL NETWORK, WALTHAM, MASS
"Adjusting on the margins but nothing shocking for markets."
"The story is largely the same as it was to start the year, in terms of the Fed expecting to see some reasonable chance of rate cuts at some point this year, driven by generally slowing growth compared to last year. But, frankly, they have kind of reacted to the fact that in this first quarter we have seen relatively strong overall economic growth."
BILL STRAZZULLO, CHIEF MARKET STRATEGIST, BELL CURVE TRADING, BOSTON
“I think they did what they basically had to do. Some of the inflation numbers had come in stronger than expected so they had to reiterate that they had more cuts coming. What that means for the market is that there’s still a little bit more runway in this rally. I still think the S&P 500 could reach 5,700 to 6,000, and then we could see a pull back, which is where we’re advising our investors to come in. So there’s nothing from the Fed that changes our overall strategy.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“The only real change is that the Fed is probably less confident about the direction of travel for inflation. Thus far, they're looking through the noise of the January and February inflation readings. The slightly less aggressive slope towards the long-term target for the federal funds rate suggests they aren't completely confident in the direction or rate of travel. If they don't know where we are, how can they know where they are going or when they will get there? They're flying by the seat of their pants.”
BILL ADAMS, CHIEF ECONOMIST, COMERICA BANK, DALLAS (by email)
"The March monetary policy statement judged that the risks to the Fed’s 'achieving its employment and inflation goals are moving into better balance,' but that they want 'greater confidence' that inflation is returning to target before they cut. This feels consistent with Chair Powell’s testimony to Congress earlier this month that the Fed is 'not far' from beginning to reduce rates, assuming that the data flow remains broadly similar over the next few months.
"The Dot Plot raised projections for the federal funds rate in 2025 and 2026, but honestly, how much value can be generated by puzzling over those projections given how much uncertainty there is over what the Fed does over the next few months? In my opinion not much."
JEFFREY MUHLENKAMP, PORTFOLIO MANAGER, MUHLENKAMP & COMPANY, WEXFORD, PA
“I didn’t see anything that’s a surprise to me. They are taking a wait-and-see approach and taking advantage of their ability to be patient, with inflation on the trajectory they want and the economy doing really well. They are taking their time and seem to be in no rush to try to push inflation further down.”
IRENE TUNKEL, CHIEF US EQUITY STRATEGIST,BCA RESEARCH, SARASOTA, FLORIDA
"I think this is marginally positive.
"The market is relieved that the Fed is still projecting three rate cuts this year. Recent too-hot inflation readings have not derailed the Fed’s plan so far. This is consistent with the baseline market expectations and is only marginally positive for equities as this scenario is fully priced in. This is a “no-harm-done” outcome."
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS
“It was modestly dovish in that the median projection of the dot plot did not change. The markets had been hoping/expecting the dot plot to remove a cut, and it didn't remove a cut so the dot plot remains the same there. The most interesting thing, though, is that they significantly increased their GDP projections for not only 2024, which they sort of had to do given how the data has been coming in, but also for 2025 and 2026. And this, combined with their increase in the longer run projection fed funds rate from 2.5 back in December to 2.6, says to me that they are increasingly believing that they do not need to see a recession in order to achieve the soft landing.
“The other thing of note is although they had said they would have an in-depth discussion of the balance sheet taper, and I assume they did have that discussion, they didn't change anything there. So that's an interesting data point. If they felt like they wanted to tighten a little bit or change the pace of runoff, they could have done that, and they chose to leave the balance sheet taper alone.“It probably pushes (a rate cut) out maybe one or two meetings. Certainly the economic data that has come in this year to date has suggested to us that June would be the first possible cut, and now I think it might be later than that.”
QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NC (by email)
"The FOMC statement was immediately welcomed by the market as traders and investors alike were growing more concerned that the Fed, concerned about the still stubborn pace of inflation edging lower, would signal more concern regarding reducing rates this year.
"In fact, three rate cuts are expected, albeit with the data dependent Fed remaining cautious as it assimilates inflation-related reports coupled with general macro-related information on the economy, particularly the health of the labor market.
"If Chairman Powell answers questions in line with statement, markets should absorb today's policy statement as a definitive catalyst for markets.
MICHAEL BROWN, MARKET ANALYST, PEPPERSTONE, LONDON
"FOMC decision very much in line with expectations as the Committee stand pat on policy, and deliver a 'copy and paste' of the January statement, with the 2024 median dot also remaining unchanged in pointing to 75 bp of rate cuts this year."
"Clearly, in light of this, the May meeting is not live for a cut, barring a financial accident, as the Committee continue to seek further confidence that inflation is returning to target before firing the starting gun on the easing cycle."
"Overall, the March FOMC changes little in terms of the bigger-picture policy outlook, with rate cuts and an end to QT still on the horizon, a backdrop that should remain supportive for risk over the medium-term."
MICHELE RANERI, VICE PRESIDENT OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO (by email)
“While inflation continues to trend towards more normal levels, today’s decision from the Fed is to hold interest rates at their current levels and that any potential decreases will take place later in 2024. This means U.S. consumers who continue to face relatively high interest rates across a range of credit products will have to wait at least a bit longer for rate relief. When rates do begin falling, the effects throughout the credit industry will be real but will likely be slow to take root.
"As we’ve recently reported in our Q4 2023 TransUnion Credit Industry Insights Report, consumer credit balances continue to remain at historically high levels as consumers have used that available credit to manage their finances during a recent environment of high costs. As inflation appears to be cooling, balance growth may moderate and consumers may begin, if interest rates fall – at some point in 2024 – to explore refinancing that high interest debt into lower interest credit products to reduce balances."
(Compiled by the Global Finance & Markets Breaking News team)
