Although it was already expected that the Fed would keep interest rates unchanged in the 5.25–5.50% range at last week’s meeting, all eyes were on the quarterly economic projections and, more importantly, the new dot plot, as it would provide the clearest indications of when and by how much the Fed would begin cutting interest rates.
Despite January and February inflation readings (CPI) coming in stronger than expected, the median projections of Fed members still point to a total of 75 basis points (bps) in cuts, likely divided into three 25-bps reductions. In fact, the projections show that the 75 bps now appear more likely than in December, with nine FOMC members supporting them (compared with six in December). This change was viewed as a hawkish stance, given the clear shift of members who had expected 100 bps (or more) toward 75 bps.
For 2025, participants now expect three cuts, down from four in December, and in 2026, three interest rate reductions are still projected.
At the post-meeting conference, Fed Chair Jerome Powell, referring to the disinflationary process, described recent inflation data merely as “blips.” Powell also warned that data from just two months cannot be considered a “trend.”
In fact, although the Fed believes that inflation will be more persistent than expected (as reflected in the upward revision of the 2024 core inflation forecast), it remains confident that both headline and core inflation will reach the 2% target by 2026.
Another point that became clear is that the probability of a recession in the U.S. economy is declining. In fact, GDP growth was revised upward by 0.7 pp for this year and by 0.2 pp for the next two years, further supporting the notion of a soft landing.
Referring to the labor market, Powell stated that, although it has shown signs of slowing, it is unlikely to weaken unexpectedly, as reflected in the downward revision of the unemployment rate for this year.
Immediately after the meeting, investors reassessed their expectations for the first rate cut, raising the probability of a June cut from 57% to 69%.
In summary, despite the projections being revised quite optimistically, a total of 75 bps in rate cuts is still anticipated for this year, thereby reinforcing market expectations for the first cut in June.
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