The U.S. Fed’s ‘patience and predictability’ mantra

Three rate cuts still expected by year-end

As was widely expected, the Federal Reserve (Fed) decided to leave the fed funds rate unchanged at its March 20 Federal Open Market Committee (FOMC) meeting, with members voting unanimously to maintain the target rate range at 5.25% to 5.50%.

Although there were no huge surprises coming out of the meeting, the subsequent statement and press conference from Fed Chair Jay Powell was interesting nonetheless, and may have provided hints at how the FOMC is thinking about future monetary policy changes. It was also a quarterly FOMC meeting, so the Fed’s updated “dot plot” (formally named The Summary of Economic Projections, or SEP) was released.

Despite the 2024 gross domestic product growth expectations rising to 2.1% from 1.4%, the unemployment rate still near historic 50-year lows, and some recent data points showing inflation might be a bit stickier than expected, the Fed continues to believe that overall the case for easing monetary policy through cutting interest rates is still very much intact. In fact, the median dot still shows the central bank cutting rates three times by year end, with each cut done in the minimum increment of 25 basis points.

Also as expected, the Fed communicated to the markets that the voting members have begun discussing when it might be appropriate to slow down their balance sheet trimming of US$95 billion a month, mostly in long-duration U.S. Treasuries. The Fed’s balance sheet is still north of US$7.5 trillion though, after nearly doubling in size to US$9 trillion in response to issues created by the Covid-19 pandemic.

Fed Chair Powell also repeated that the “committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% target.” The FOMC also continued to say that the risks to achieving its dual mandate of price stability and maximum employment have kept “moving into better balance.”

Finally, Fed policymakers stressed that they would continue to be highly data-dependent in their monetary policy decisions, and that economic activity has continued to expand at a solid pace, inflation has eased but remains elevated, and that job gains remain strong.

All in all, the markets responded well, with most major domestic equity indexes up about 1% by day’s end with no meaningful moves in U.S. Treasury rates.

Powell and the Fed are certainly following their recent mantra of striving for “patience and predictability.”

Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter. Rick Polsinello, Senior Market Strategist, Franklin Templeton Institute, contributed to this article.

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