You will find below a commentary by Xiao Cui, Senior Economist at Pictet Wealth Management, ahead of the Fed meeting this Wednesday (20 March).
We expect the FOMC to leave rates on hold and make little change to the post-meeting statement. A cut at the next meeting in May is likely not on the table, therefore the forward guidance of needing to gain greater confidence before rate cuts should remain.
The updated dot plot and inflation projections should be the focus of the FOMC meeting. We expect the median dot for this year to remain unchanged and show three cuts (-75bps) to 4.625%. However, there is a meaningful risk the median dot shifts to show just two cuts (50bps). Note that it would take only two policymakers to shift the median from three cuts to two. We expect the median dots for 2025 and 2026 to show an unchanged number of four and three cuts, respectively. We see risks skewed to the upside for the longer-run interest rate projections. The median could stay unchanged at 2.5%, but the mean will most likely shift higher.
We expect changes to the Summary of Economic Projections (SEP) will show higher GDP growth this year and slightly higher forecast for core PCE inflation from 2.4% to 2.5%/2.6%. Inflation was lower than many Fed officials had anticipated in December but then was stronger in January and February. A key question for the FOMC is how confident policymakers are that two months in a row of upside surprises in core inflation will prove temporary. If the 2024 core PCE inflation projections rise significantly more than expected, it would be revealing that officials have become less optimistic about the disinflationary trend.
Chair Powell will be grilled on the timing and pace of cuts this year. How he characterizes the recent inflation data will matter significantly. We do not expect him to deviate from his Humphrey Hawkins testimony that rate reduction will likely be appropriate at some point this year but officials want to be more confident that inflation is on a sustainable path. We would expect Powell to underscore that the path to 2% will be bumpy, a view that other Fed officials have emphasized. We expect the Chair to cite a balanced view between the risk of cutting too soon and the risk of keeping rates high for too long.
The FOMC will discuss slowing the pace of balance sheet runoff this week. Powell will provide some broad strokes but details will likely come out in the minutes three weeks after. The Fed is still on track to taper the pace of QT and we expect the Fed to make an announcement at its May meeting. The speed of decline in the ON RRP facility and bank reserves, which are highly uncertain, will likely dictate the timing and cadence of tapering.
In our view, the January and February core inflation data were a disappointment in that they did not give officials more confidence that inflation will eventually settle around 2%. However, they were not enough to reverse the disinflationary outlook. We think there is some residual seasonality in the data, boosting Jan/Feb inflation readings, and we expect inflation to slow in the coming few months. We expect slowing inflation in Q2, a slowing labor market, and a slowdown in growth would enable the Fed to initiate the first cut in June, and we expect five cuts in total this year. The risk is clearly skewed towards a more gradual easing cycle and a slightly later start, in light of the rebound in inflation readings.
