FOMC Meeting: Reiterating Data Dependency & Reinforcing A Higher-For-Longer Rate Reality

Weekly Economic Review: March 18, 2024

Last week’s economic highlight was the completion of the Federal Reserve’s two-day FOMC (Federal Open Market Committee) meeting. The Fed opted to keep interest rates unchanged, but confirmed its outlook for three 25-basis point rate cuts this year, all of which was in line with market expectations.  Let’s review the FOMC meeting and press conference in more detail, as well as existing housing data that was released during the week. 

Last Wednesday, the Fed also released its updated Summary of Economic Projections (SEP). Some key highlights from the SEP included:

1. Maintaining three 25-bp rate cuts in 2024 (which would result in a Fed Funds rate of 4.50-4.75%),
2. Reducing the anticipated four 25-bp rate cuts in 2025 to three (a bit of a surprise, which would result in 3.75-4.00% Fed Funds rate),
3. Maintaining three 25-bp rate cuts in 2026 (resulting in a Fed Funds rate projection of 3.00-3.25%),
4. Raising the Fed’s inflation expectation from 2.4% to 2.6% in 2024,
5. Significantly increasing its GDP growth projection to 2.1% from 1.4% in 2024, and
6. Slightly lowering the anticipated unemployment rate from 4.1% to 4.0%.

In the SEP, the Fed delivered another small surprise, an increase of its long-term rate projection from 2.5% to 2.6%. The market is debating whether the long-term (or neutral) rate should be higher than the Fed’s 2.6%, based on inflationary pressures from deglobalization, reduced immigration, high tariffs, and accommodative fiscal policy.

Chair Powell held his customary press conference immediately after the FOMC meeting. He downplayed January and February’s hotter-than-expected inflation data.  He also repeated some familiar themes:

1. The first-rate reduction would likely to be at some point this year,
2. The Fed will start cutting rates when it has confidence that inflation will sustainably continue to decline to its 2% target,
3. Inflation has been coming down gradually on a sometimes bumpy road toward 2%,
4. The Fed is not overreacting to the recent hot inflation figures, nor is it ignoring them,
5. A strong labor market, in and of itself, would not be a reason to hold off on rate cuts, and
6. It will be appropriate to slow the pace of the Fed’s balance sheet run-off (i.e. ease its quantitative tightening) fairly soon.

Overall, the market considered the FOMC and Chair Powell’s press conference to be dovish, as the FOMC members kept three rate cuts in 2024, while raising their economic growth and inflation expectations and lowering the anticipated unemployment rate.  After the press conference, all Treasury yields came down. When compared to one week ago, the two-year yield declined 13 basis points to 4.59% and the ten-year yield 9 basis points to 4.22%. As a result, stocks and bonds rallied, and the market raised its probability of a rate cut in June from 67% to 82%.

While the Fed FOMC meeting dominated the headlines, it was not the only event in the economic landscape. Last Thursday, the National Association of Realtors (NAR) released the data on February sales of existing homes.  The data showed an unexpected surge in sales of 9.5% in February, from an annualized rate 4 million in January to a February rate of 4.48 million, the highest in a year. The market expectation was a 1.3% decline in February.  Buyers may be accepting today’s high mortgage rates because they cannot delay moving any longer and housing prices continue to rise; the median selling price increased 5.7% to $384,500 from a year ago. Of course, cash sales represented a third of total transactions, and these buyers are not affected by high mortgage rates.  At the current sales pace, selling all the homes on the market would take 2.9 months, the lowest in about a year, indicating a tight market. On a concluding note, the Fed painted a picture of good economic growth and low unemployment in the near future. It is trying to engineer a soft landing for the U.S. economy, and is tolerating a higher inflation rate to do so.  Also, it has not yet come to a decision on how to phase out its quantitative tightening program. The March FOMC meeting and press conference remind us of Chair Powell’s speech at the Fed’s annual Jackson Hole Economic Symposium back in 2022, indicating that the rate hikes will bring some pain to households and businesses.  While there is hope for the future, it looks like we will continue to feel that pain for a bit longer than expected.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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