PIMCO: US Federal Reserve meeting reaction
PIMCO: US Federal Reserve meeting reaction
By Tiffany Wilding, Managing Director & Economist
1) What Happened?
The U.S. Federal Open Market Committee Meeting (FOMC) chose to maintain its interest rate at its 5.25 – 5.5% level. The statement and projections were broadly in line with expectations; while the 2024 rate forecasts, a near-term road map of what the Fed is considering regarding future interest-rate moves, was unchanged, showing 75 basis points (bps) of cuts (in line with expectations, but less hawkish than feared). Economic projections changes were also minimal with the exception of a greater than expected upward revision to 2024 growth. Notably core PCE (Personal Consumption Expenditures, the Fed’s preferred inflation measure) was also revised higher.
2) What Does It Mean?
Overall, we think updated projections show a Fed all but committed to starting the process of normalizing rates in the coming months, while at the same time grappling with broader questions about inflation and the interest rate sensitivity of the US economy, which will dicate the pace of cuts over the next year or two. With Fed officials still projecting that core PCE will remain in the “two point something” range, we continue to expect a baseline of 75 bps of cuts in 2024 starting in June, but view the near term risks as skewed toward fewer cuts being delivered than what is currently forecasted by Fed officials.
3) What Is Next?
Federal Reserve Chair Jerome Powell confirmed that 'fairly soon' the Fed will 'taper and extend' its balance sheet, which we expect will occur with the gradual reduction of Treasury runoff caps. We now expect the Fed may make this announcement as early as the May FOMC meeting, ahead of our previous expectation of a June announcement. Powell also signaled a high bar for rate hikes, downplaying inflation – calling the recent inflationary reacceleration 'bumps' – and pointing to labor market resilience.