The Federal Open Market Committee (FOMC) announced today that it will keep the benchmark interest rate within the range of 5.25% to 5.5%, in line with market expectations. However, the median estimate for long-term interest rates was raised to 2.6% for the first time in five years, indicating that interest rates will remain at higher levels for a longer period in the future.
FOMC, in its March rate decision, maintained the benchmark interest rate unchanged within the range of 5.25% to 5.5%, as expected by the market. It also reiterated its expectation to cut interest rates three times this year, leading to a new high for the US stock market.
Currently, the dot plot shows that the median estimate for interest rates in 2024 remains at 4.6%. However, 9 FOMC officials believe that there should be a maximum of two rate cuts this year, and more officials believe that there should be fewer rate cuts, indicating that inflation in the US remains severe.
It is worth noting that officials have also raised the median estimate for interest rates in 2025 and 2026, from 3.6% to 3.9% and from 2.9% to 3.1% respectively. The median estimate for long-term interest rates was raised to above 2.5% (increased to 2.6%) for the first time in five years. This change means that interest rates will need to remain at higher levels for a longer period, which may hinder the arrival of low-rate hot money in the future.
This adjustment is based on the intention of the Federal Reserve to move the real neutral interest rate towards 3%, while keeping the long-term inflation expectation at the 2% target.
Facing higher-than-expected inflation data for January and February (consumer price index and personal consumption expenditure), Fed Chairman Powell believes that these data further demonstrate the non-linear downward path of inflation. He pointed out that lower inflation data in the second half of last year may make it more difficult to achieve the 2% inflation target in the next 12 months. However, the Federal Reserve is still looking for data to confirm the low inflation data observed last year and hopes that these data will increase their confidence in sustainable inflation decline towards the 2% target.
In other words, despite the challenges of higher short-term inflation rates, the Federal Reserve is still focused on long-term inflation trends, especially looking for solid data evidence to confirm that inflation is indeed stabilizing at their target level. This statement reflects the cautious attitude of the Federal Reserve in deciding whether to cut interest rates. Therefore, as Powell previously stated, the Federal Reserve will not cut interest rates until there is more confidence in the sustainability of inflation moving towards 2%.
In this meeting, the Federal Reserve also released its new quarterly economic forecast, raising the core personal consumption expenditure (PCE) forecast by 0.2% to 2.6%. Although this forecast is lower than the current level of 2.85%, the speed and magnitude of the adjustment have slowed down, which may affect the timing of the Federal Reserve’s interest rate cuts.
In addition, the Federal Reserve expects the economy (real GDP) to grow by 2.1% this year, a significant increase from the previous forecast of 1.4% growth in the previous quarter. At the same time, it is expected that the unemployment rate will only reach 4% by the end of 2024, which is almost unchanged compared to the current level of 3.9%.
As for when to start tapering or stopping the balance sheet reduction, Powell stated that no decision has been made yet, and this will be a primary consideration at the next meeting. However, he pointed out that the adjustment is not far away, perhaps implying that the Federal Reserve may slow down the pace of balance sheet reduction at the next meeting in May, but will still maintain the reduction for some time.