Still on Hold, But More to Come

Key Takeaways

• The Federal Reserve’s Federal Open Market Committee (FOMC) held the federal funds target rate range at a 23-year high of 5.25% to 5.50%, but reiterated a plan to cut rates when the data warrants it.
• Market expectations for the FOMC to hold their benchmark rate steady at the current range started the meeting at 99%, a dramatic difference from after their meeting in January where expectations were at 62%.
• Revisions to the Fed’s Summary of Economic Projections (SEP) from December were mostly unchanged. The dot plot showed three expected rate cuts for 2024 (unchanged from December), three for 2025 vs. four forecasted in December’s SEP and three for 2026 vs. none forecast in December.
• Unemployment, GDP and Core PCE were also updated for 2024 from the December projections. Unemployment was revised lower by -0.1%, GDP was revised higher by 0.7%, and Core PCE was revised higher by 0.2%. For 2025 and 2026, unemployment and Core PCE were mostly unchanged, while GDP was revised higher.

At their March meeting, Federal Open Market Committee (FOMC) members unanimously agreed to leave the fed funds rate range unchanged at 5.25% to 5.50%. With little hope of a rate cut at the meeting, investors focused on the committee’s update to their statement and the SEP, as well as the committee’s plans for the balance sheet. There was little change to the Fed’s statement from January, but the SEP saw some revisions from December.

Inflation has firmed up notably since the last meeting, with core CPI prints at approximately 0.4% month-over-month in both January and February, and core PCE inflation printing at 0.4% month-over-month in January, substantially stronger than the last few months of 2023. The recent inflation data has unfortunately not helped the FOMC gain confidence that inflation is moving sustainably closer to their 2% target. It appears inflation has dug in for the spring.

Since the January FOMC meeting, incoming activity data has painted a blurry picture for markets. Strong growth in personal consumption appeared to have slowed meaningfully in the last two months, with retail sales delivering two consecutive soft prints. However, with continued strength in services consumption in January and supportive consumption fundamentals, the FOMC has viewed the retail sales data as a soft patch, attributing much of the weakness to January’s weather-related disruptions, troubles in global shipping, and problematic seasonal adjustments. The other components of demand – government spending, housing construction, and nonresidential fixed investment – have remained quite resilient, while inventory investment has seen little of the expected drag that investors may have expected.

While the labor market has continued to remain tight from the standpoint of the Fed, supply and demand conditions have “come into better balance” from its point of view. Payroll employment increases month-over-month have also appeared to indicate some acceleration in the labor market, all of which has likely been supported by the continued increase in labor supply and immigration. The committee expects the rebalancing in the labor market to continue, which should ease the upward pressure on inflation and help to move inflation closer to the committee’s 2% target.

In addition, the Federal Reserve will continue to allow up to $95 billion in assets to roll off its roughly $7.7 trillion balance sheet, allowing $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature month-over-month. The Fed has so far rolled off $1.5 trillion from its balance sheet.

Below are the Fed statement language changes from January:

Here are the committee’s March projections for GDP, unemployment, inflation, and the federal funds rate for 2024 through 2026:

Market Reaction

After the Fed announcement, the 10-year Treasury ended the day lower and finished at 4.27%; short and long rates were mixed for the day.

10-Year Treasury Yield Over the Past 12 Months

Equity markets closed in negative territory on the final day of the FOMC meeting, as the committee made it clear that it was in no rush to cut the benchmark rate. While Chair Powell stated the committee would move to cut rates should labor markets come under pressure or reductions in inflation appear to be sustainable, that was not enough to appease equity markets. Both the Dow Jones Industrial Average and S&P 500 Index finished down -0.82% and -1.61%, respectively, for the day.

In Conclusion

The first FOMC meeting of the year met market expectations by again keeping interest rates steady, but the Fed’s rhetoric also provided a keen reminder of the central bank’s determination to drive inflation back to its 2% target. While it appeared that many market participants expected the Fed to be closer to making its first cut in the fed funds rate since the hiking-cycle began, the committee made it clear rate cuts won’t begin until the data supports the recent decrease in inflation is sustainable.

So, while investors have seen risk rewarded since the last time the Fed met in December (high-yield bonds, represented by Bloomberg Corporate High Yield; bank loans, represented by Morningstar LSTA; and equities, represented by Russell 3000 have been up 2.37%, 1.71% and 4.58%, respectively), the economic optimism shown by Chair Powell seemed to be overshadowed in investor’s eyes by his and the committee’s comments about the sustainability of the reduction in inflation. This also seemed to potentially signal to investors that they may need to reassess expectations of how higher-for-longer might impact company financials given a more tepid stance by the Fed on the state of inflation. But time will tell if investors remember what was said today or if they will take an out-of-sight, out-of-mind approach until the Fed’s next meeting in March.

Definitions:

One basis point is equal to 0.01%.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Personal Consumption Expenditures (PCE) refers to a measure imputed household expenditures defined for a period of time.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

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