The Federal Reserve continues to hold its ground, and its expectations for three rate cuts this year remain unchanged, warning that interest rates will be higher than expected thereafter

The Fed continued to hold its nerve as expected and reiterated that it would wait until it was more confident about inflation before cutting interest rates, while the dot plot suggested that Fed officials were expecting higher interest rates for the next two years and beyond than before, warning that long-term interest rates would be higher than expected.

On Wednesday, March 20, Eastern time, the Federal Reserve announced after the FOMC meeting of its Monetary Policy Committee that the target range for the federal funds rate remained at 5.25% to 5.50%. Since raising interest rates in July last year, the Fed has kept the policy rate at its highest level in more than two decades.

In the current tightening cycle from March 2022 to the present, the Fed has not raised interest rates at five consecutive meetings. As in the previous 13 meetings since July 2022, FOMC voting members voted unanimously in favor of the interest rate decision.

After the release of the monetary policy decision statement, economic outlook and interest rate expectations dot plot, Nick Timiraos, a reporter known as the "New Fed News Agency", said that despite solid economic growth and stronger-than-expected inflation growth in recent months, Fed officials have not significantly revised their expectations for interest rate cuts later this year, and expect inflation to return to a slowdown momentum, and their interest rate cut prospects remain unchanged.

Ahead of the dot plot, Timiraos noted that if Fed officials raise their inflation expectations while keeping their expectations of the number of rate cuts unchanged, it will be interpreted as less concern about stronger inflation. And an upward revision of inflation expectations, along with the expectation of fewer rate cuts this year, would reflect less concern among Fed officials about weak economic growth.

The dot plot shows that the number of people who are expected to cut interest rates three times this year will increase by three people, and the number of people who are expected to cut interest rates four times is only one person left

The dot plot shows that compared with the dot plot released in December last year, Fed officials' predictions for the number of rate cuts this year are more concentrated in three times. Of the 19 Fed officials who provided interest rate forecasts, 15 expect rates to fall below 5.0% this year, one fewer than last time.

Of the 15 people, five expect interest rates to be 4.75% to 5.0%, estimated at 25 basis points per cut, which is equivalent to two rate cuts this year, and the number of people who predict this is the same as the last dot plot, and nine expect it to be 4.50% to 4.75%, which is equivalent to three rate cuts this year, an increase of three from the last dot plot.

In this way, 10 of the 19 Fed officials, accounting for nearly 53%, expect at least three rate cuts next year, about the same proportion as predicted in the last dot plot. The number of people predicting at least four rate cuts is significantly lower, with only one expecting rates to be between 4.25% and 4.50%, which is equivalent to four rate cuts, three fewer than the last dot plot forecast. Last time, there was another person who expected interest rates to be below 4.0%, but no one predicted that this time.

Interest rates will still be cut by 75 basis points this year, and interest rate expectations for the year after next and beyond will be raised

According to the median interest rate projections released after the meeting, Fed officials kept their policy rate expectations unchanged for this year compared to the last outlook in December last year, while raising their interest rate forecasts for next year and the year after, with the following median projections:

The federal funds rate at the end of 2024 was 4.6%, unchanged from December 2023 expectations. The federal funds rate at the end of 2025 is 3.9%, a 30 basis point increase from the 3.6% expected in December. The federal funds rate at the end of 2026 is 3.1%, a 20 basis point increase from the 2.9% expected in December. The longer-term federal funds rate came in at 2.6%, a 10 basis point increase from the 2.5% expected in December.

Using the latest median projections, Fed officials expect a 75 basis point cut by the end of the year when interest rates reach an average of 4.65 percent by the end of the year, equivalent to three 25 basis point cuts, exactly the same as last December. The increase in annual interest rate expectations after next year is equivalent to one or nearly one 25 basis point rate cut, and the Fed expects the number of rate cuts to fall to less than one by then.

The increase in expectations for longer-term rates is equivalent to a 10 basis point increase in Fed officials' expectations for the so-called neutral rate to 2.6%. In the dot plot, this change appears to be small, with a total of 10 people predicting longer-term interest rates of 2.5% to 2.75%, in line with the number predicted in the last dot plot. Last time, three people expected interest rates to be below 2.5%, between 2.25% and 2.5%, and only one did so this time.

GDP growth and core PCE inflation expectations revised upwards this year Unemployment rate expectations are lowered

According to the economic outlook released after the meeting, Fed officials raised their GDP growth forecasts for this year and next three years, including a sharp increase of 0.7 percentage points, or 70 basis points, this year, 20 basis points and 10 basis points respectively in the next two years, a slight reduction of 10 basis points in unemployment expectations for this year and the year after, a slight 10 basis point increase in PCE inflation expectations for next year, and a 20 basis point increase in core PCE inflation expectations for this year.

The specific adjustments are as follows:

GDP growth is expected to be 2.1% in 2024, 1.4% in December, 2.0% in 2025, 1.8% in December, 2.0% in 2026, 1.9% in December, and 1.8% in the longer term, unchanged from December.

The unemployment rate is expected to be 4.0% in both 2024 and 2016, both below the 4.1% expected in December, the unemployment rate is expected to remain at 4.1% in 2025, and the longer-term unemployment rate is expected to be 4.1% after 2026, both unchanged in December.

PCE inflation expectations for 2024 are unchanged from 2.4% in December, 2.2% in 2025, 2.1% in December, and 2.0% in 2026 and longer-term.

Core PCE expectations are 2.6% in 2024, 2.4% in December, and 2.2% and 2.0% in 2025 and 2026, respectively, both unchanged from December expectations.

Reaffirmed that there is more confidence in the reduction of inflation to the target before cutting interest rates, the risks of employment and inflation reaching the target are more balanced, and the balance sheet reduction is still on schedule

The Fed's decision statement is largely the same as the last one at the end of January. The only change from last time is that last time, it said that "job growth has slowed since the beginning of last year, but it is still strong", and this time it was directly changed to "employment is still strong".

The statement completely replicates the forward guidance on interest rates that was adjusted last time, and reiterates the two new phrases added last time:

"In considering any adjustments to the target range for the federal funds rate, the (FOMC) Committee will carefully assess future data, the evolving outlook, and the balance of risks. The Committee does not expect it to be appropriate to lower the target range until there is more confidence in the sustained 2% movement of inflation. ”

The statement went on to emphasize the Fed's strong commitment to bringing inflation back down to its 2% target.

The statement reiterated the "risks to achieving employment and inflation targets are moving towards a better balance" and the "uncertain economic outlook" added last time, and then went on to reiterate that "inflation risks remain highly focused".

In assessing economic activity, this time we reiterated that "economic activity is expanding at a steady pace" that was added last time, and continued to reiterate the assessment of the slowdown in inflation in the December statement last year, that is, "inflation has slowed down over the past year, but it is still high".

As in the previous 13 meetings, the statement did not announce a new line for reducing the balance sheet (balance sheet), and continued to reiterate that it will continue to reduce its holdings of Treasuries, agency bonds and agency mortgage-backed securities (MBS) as previously announced.