March FOMC Meeting highlights: Economic Projections and Policy Outlook

On Summary of Economic Projections (SEPs)

We have received a mixed bag of SEPs this time. A shift in 1 FOMC member from 3 interest rate cuts to 2 cuts could have taken the median from 3 to 2. The core PCE inflation, as per SEPs, increased from 2.4% to 2.6%, along with a decrease in the unemployment rate by 0.1% and higher GDP. So, for 2024, SEPs suggest a better forecast for growth together with higher inflation. Though the median dots for 2024 are still unchanged, the mean changed from 67 bps of easing to 56 bps.

What gathered the highlight of yesterday’s meeting was the increase in dots for 2025 from signaling 4 rate cuts last time to 3 cuts this time, suggesting that FOMC feels we would require some rate cuts to remove restrictiveness in the policy, but not a huge number of them unless the economy tanks.

Finally, this time, after much speculation since the last few SEPs, we got an increase in the longer run dots from 2.5% to 2.6%: a reflection of a near consensus amongst almost all central bankers that post-pandemic, the economy might have undergone a structural change due to which we might witness somewhat higher rates rather than lower longer-term rates which was the norm in the post-GFC world.

On Outlook

It appeared that the recent strong inflation data did not deter the FOMC’s plan for this year’s monetary policy, showing an urge for the Fed to act upon easing it if possible. However, any time we witness weak or near-expected inflation data along with some weakening in the labor market, it could prompt the FOMC to start easing a bit.

On the Fed Balance Sheet front, FOMC does not want a repeat of Sep 2019, due to which they are being proactive to start the tapering ‘fairly soon’ to make sure they can go on for longer by moving slowly rather than moving fast and hitting an uncomfortable level of bank reserves. We should be getting more details from the minutes of this FOMC meeting on what the FOMC discussed this time.

The highlight of the Day

Powell, the Fed chair, mentioned that the 2 recent inflation reports have not changed the overall story. Overall, it looked like the FOMC had somewhat of a higher tolerance for recent inflation data acknowledging the possibility of some seasonal distortions in them.?

Conclusion

Summing up, it looked like if data doesn’t surprise going forward, the FOMC is comfortable in going ahead with some precautionary rate cuts maybe a couple of times and later reassessing how much more easing is needed as there will be more conviction on the inflation path by that time.