The Federal Open Market Committee (FOMC) announced today that the benchmark interest rate will be maintained within the range of 5.25% to 5.5%, in line with market expectations. However, the median expectation for the first increase in long-term interest rates in five years by the Federal Reserve is now at 2.6%, indicating that interest rates will remain at higher levels for a longer period in the future.
Summary:
Bitcoin breaks through 68,000! Fed freezes interest rates for the fifth time, Powell signals “three rate cuts this year”, and US stocks hit a new all-time high.
Background:
Wall Street’s dream scenario: “Mild economic recession” in 2024 followed by rate cuts, the anti-inflation war has been won.
Table of Contents:
Federal Reserve raises long-term interest rate expectations to above 2.5%
Powell reiterates that inflation needs to approach 2% for rate cuts
New quarterly economic forecast: Core PCE expectations raised to 2.6%
The Federal Open Market Committee (FOMC) concluded its March interest rate decision this morning, as expected by the market, by maintaining the benchmark interest rate within the range of 5.25% to 5.5% for the fifth consecutive time, and still expects three rate cuts this year, leading US stocks to hit new highs.
Currently, the expected median rate for 2024 remains at 4.6%. However, this time, 9 Federal Reserve officials believe that there should be a maximum of two rate cuts this year, and more officials believe that there should be fewer rate cuts, indicating that inflation in the United States is still a concern.
FED Dot Plot. Source: FOMC Official Website
First increase in long-term interest rate expectations to above 2.5%
It is worth noting that officials have also raised their median expectations for interest rates in 2025 and 2026, from 3.6% to 3.9% and from 2.9% to 3.1%, respectively. The median expectation for the first increase in long-term interest rates in five years is now above 2.5% (raised to 2.6%), which means that interest rates will need to remain at higher levels for a longer period, which may hinder the influx of low-rate hot money in the future.
Behind this adjustment is the Federal Reserve’s intention to move the real neutral interest rate towards 3% while keeping the long-term inflation expectation at the 2% target.
Facing the higher-than-expected inflation data for January and February (Consumer Price Index and Personal Consumption Expenditures), Federal Reserve Chairman Powell believes that these data further demonstrate the nonlinear downward path of inflation. He stated that due to relatively low inflation data in the second half of last year, it may become more difficult to achieve the 2% inflation target in the next 12 months. However, the Federal Reserve is still looking for data to confirm the low inflation data observed last year, and hopes that these data will increase their confidence in inflation sustainably declining to the 2% target.
In other words, despite the challenges of higher short-term inflation rates, the Federal Reserve is still focused on the long-term inflation trend, especially on finding solid data evidence to confirm that inflation is indeed steadily falling to their target level. This statement reflects the cautious attitude of the Federal Reserve when deciding whether to cut interest rates. Therefore, the ultimate key, as Powell previously stated, is that the Federal Reserve will cut interest rates only when there is more confidence in inflation sustainably approaching 2%.
In this meeting, the Federal Reserve also released new quarterly economic forecasts, raising the core Personal Consumption Expenditures (PCE) expectations by 0.2% to 2.6%. Although this expectation is lower than the current level of 2.85%, the pace and magnitude of the decline have slowed down, which may affect the timing of the Federal Reserve’s interest rate cuts.
In addition, the Federal Reserve expects the economy (real GDP) to grow by 2.1% this year, a significant increase from the previous quarter’s forecast of 1.4% growth. At the same time, it is expected that the unemployment rate will only reach 4% by the end of 2024, almost unchanged from the current level of 3.9%.
As for when to start tapering or stop tapering, Powell stated that no decision has been made yet and it will be the main consideration in the next meeting. However, he pointed out that the adjustment is not far away, perhaps indicating that in the next meeting in May, the Federal Reserve may slow down the pace of tapering but will still maintain tapering for some time.
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