The Fed: Steady as she goes

Stephen Dover, CFA, Head of Franklin Templeton Institute

Rick Polsinello CIMA?, Senior Market Strategist, Franklin Templeton Institute

As was widely expected, the Federal Reserve (Fed) decided to leave the fed funds rate unchanged at its March 20 Federal Open Market Committee (FOMC) meeting, with members voting unanimously to maintain the target rate range at 5.25% to 5.50%.

Although there were no huge surprises coming out of the meeting, the subsequent statement and press conference from Fed Chair Jay Powell was interesting nonetheless and may have provided hints at how the FOMC is thinking about future monetary policy changes. It was also a quarterly FOMC meeting, so the Fed’s updated “dot plot” (formally named The Summary of Economic Projections, or SEP) was released.

Despite the 2024 gross domestic product growth expectations rising to 2.1% from 1.4%, the unemployment rate still near historic 50-year lows and some recent data points showing inflation might be a bit stickier than expected, the Fed continues to believe that overall the case for easing monetary policy through cutting interest rates is still very much intact. In fact, the median dot still shows the central bank cutting rates three times by year end, with each cut done in the minimum increment of 25 basis points.

As of March 21, 2024. Sources: Federal Reserve, Macrobond. FOMC=Federal Open Market Committee. For each period, the median represents the middle projection of Federal Reserve Board members and Federal Reserve Bank presidents when the projections are arranged from lowest to highest. In cases where the number of projections is even, the median is calculated as the average of the two middle projections. There is no assurance that any estimate, forecast or projection will be realized.

Also as expected, the Fed communicated to the markets that the voting members have begun discussing when it might be appropriate to slow down their balance sheet trimming of US$95 billion a month, mostly in long-duration US Treasuries. The Fed’s balance sheet is still north of US$7.5 trillion though, after nearly doubling in size to $9 trillion in response to issues created by the COVID-19 pandemic.

Fed Chair Powell also repeated that the “committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% target.” The FOMC also continued to say that the risks to achieving its dual mandate of price stability and maximum employment have kept “moving into better balance.”

Finally, Fed policymakers stressed that they would continue to be highly data-dependent in their monetary policy decisions, and that economic activity has continued to expand at a solid pace, inflation has eased but remains elevated, and that job gains remain strong.

All in all, the markets responded well, with most major domestic equity indexes up about 1% by day’s end with no meaningful moves in US Treasury rates.

Powell and the Fed are certainly following their recent mantra of striving for “patience and predictability.”

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