The Fed stays the course

The Federal Open Market Committee (FOMC or Fed) left monetary policy unchanged at its March 20 meeting but continued to signal that it is likely to cut interest rates three times in 2024. Some market participants had begun to worry that the Fed would push back plans to ease policy because January and February inflation data came in a bit higher than expected. Although the latest inflation data indeed support keeping policy tight for two or three more months, they do not fundamentally change the fact that inflation dropped substantially last year and is likely to step down a bit more over the course of this year. If the next few months' economic data turn out as expected, the Fed will begin to ease policy in order to avoid cooling off the economy too much.

The FOMC released a new set of economic projections in March, something it does every other meeting. The median FOMC participant now projects much stronger GDP growth in 2024 and beyond compared to the December projections. Previously, the economy was projected to grow a slow 1.4 percent in 2024, and now it is projected to grow a moderate 2.1 percent, with a slight markup from 1.8 percent to 2.0 percent for 2025.¹ The recent news on inflation appears to have driven a modest upward revision in projected core inflation in 2024 from 2.4 percent to 2.6 percent, but both core and overall inflation are projected to decline smoothly to their 2 percent target by 2026.

At the press conference after the meeting, several journalists noted that the overall and core measures of the Fed's preferred inflation gauge, the change in the price of personal consumption expenditures (PCE), were essentially at the 2 percent target in the last six months of 2023. Chair Jerome Powell acknowledged this progress but said repeatedly that the FOMC needs to see more than six months of good inflation data. Surprisingly, neither Powell nor any journalist noted that both overall and core PCE prices rose at a 2.5 percent rate in the six months through January 2024 and that the six month rate of inflation is likely to come in above 2 percent again for February, based on the consumer price index (CPI) data for February that were released earlier in March.

When asked when the Fed may start to cut rates, Powell said that it is unlikely the Fed would have enough confidence in the inflation slowdown by the next meeting in May,² but he left open the possibility of a cut in June, which seems to be the expectation of many market participants.  

Notes

1. The FOMC projections for growth and inflation are based on Q4/Q4 changes.

2. Powell referred a couple times to the "March" meeting when he clearly meant "May."