March 20, 2024
What Just Happened?
By Chief Economist, Jeanette Garretty
The just-concluded March meeting of the Federal Open Market Committee (FOMC) ended with an unsurprising statement leaving the target Fed Funds at 5.25%-5.5% and citing a need for more data on inflation before initiating a series of interest rate cuts. The accompanying Summary of Economic Projections (SEP)— the “dot plots” forecast of economic growth, unemployment, and interest rates by members of FOMC— was somewhat more surprising. FOMC members significantly raised the expected rate of economic growth for 2024 (to 2.1%, vs. the 1.4% forecast made in December 2023), left their forecast for inflation at year-end unchanged (2.4%), and kept in place an implied three Fed Funds rate cuts sometime this year. As stated in the first question of the press conference, “Does this imply more tolerance for higher inflation?” Chairman Powell shot that down, but nevertheless . . .
One way to think of the message delivered by the SEP is as a firm commitment to developing a new monetary policy regime. More specifically, FOMC members have accepted the view, recently espoused by Chairman Powell in a number of forums, that monetary policy is sufficiently restrictive to ultimately achieve the Fed’s goal of 2% inflation. This goal was never expected to be achieved until at least 2025. A further signal of the change in monetary policy was Chairman Powell’s mention that the FOMC had discussed slowing the pace of run-off in the Fed balance sheet “fairly soon,” partly to “ensure a smooth transition and to avoid money market stress.” Note the word “transition”; in a number of small and large ways, it would seem that the FOMC is clearly thinking in terms of transition to a lower interest rate, lower inflation, and stable growth environment. It also seems clear that the FOMC and Chairman Powell are expecting a transition this year to a NEW environment, NOT a return to a pre-pandemic climate. Several times in the press conference, Chairman Powell mentioned that rates are unlikely to return to previously unusually low-interest rates.
Emphasis should be given to the still considerable uncertainty as to exactly when the FOMC will decide to initiate the rate cuts. Early on in the press conference, Chairman Powell stated the obvious: the target Fed Funds rate of 4.6% “is not a committee decision or plan.” More so than most times, the minutes of this meeting will be an interesting read when released in three weeks, but while there is a notable range of estimates by FOMC members, the narrow range of the forecasts might indicate a critical development in moving to a decision/plan. Last year’s theme for meetings might have been “Some Day, A Transition”. This year’s FOMC theme may be “Transition!” (You can hum Fiddler on the Roof if you like.) The link between these themes is, of course, “data-driven”; truthfully, when is the Federal Reserve not data-driven (a rather scary thought if it were not)
The press conference was notable for the absence of ill-chosen words or alarming allusions disrupting investors’ reverie on a soft-landing nirvana. Powell consistently referred to the strength of the economy, the “better balance” of labor market fundamentals, his lack of concern about wage growth, and his satisfaction with the progress on inflation made thus far while acknowledging the need for continued focus on inflation reduction. Although he did comment early on that the FOMC felt that high-interest rates were “weighing” on the economy, he did not call out any particularly alarming stresses in either the financial system or economic activity. The entertainment value in this press conference was confined to a question about a letter sent to the Federal Reserve by Sen. Elizabeth Warren, asking that interest rates be lowered because the Fed’s policy of higher interest rates has stood in the way of achieving climate goals. Chairman Powell’s response was an appreciated reminder of who does what: The Federal Reserve does monetary policy, and the Federal Government does fiscal policy. COVID placed the Federal Reserve, at times, in a position of trying to do it all, and it is with no doubt great relief that the Federal Reserve can go back to its basic business of managing the money supply appropriately for a growing economy, without micromanagement of the sectors, geographies, and constituencies of the sprawling, dynamic, complicated — and truly amazing— US economy.
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