March 2024

Still on Hold, But More to Come

A stronger economy and more future rate cuts seemed to meet market expectations for a patient Fed.



Key Takeaways

  • The Federal Reserve’s Federal Open Market Committee (FOMC) held the federal funds target rate range at a 23-year high of 5.25% to 5.50%, but reiterated a plan to cut rates when the data warrants it.
  • Market expectations for the FOMC to hold their benchmark rate steady at the current range started the meeting at 99%, a dramatic difference from after their meeting in January where expectations were at 62%.
  • Revisions to the Fed’s Summary of Economic Projections (SEP) from December were mostly unchanged. The dot plot showed three expected rate cuts for 2024 (unchanged from December), three for 2025 vs. four forecasted in December’s SEP and three for 2026 vs. none forecast in December.
  • Unemployment, GDP and Core PCE were also updated for 2024 from the December projections. Unemployment was revised lower by -0.1%, GDP was revised higher by 0.7%, and Core PCE was revised higher by 0.2%. For 2025 and 2026, unemployment and Core PCE were mostly unchanged, while GDP was revised higher.

At their March meeting, Federal Open Market Committee (FOMC) members unanimously agreed to leave the fed funds rate range unchanged at 5.25% to 5.50%. With little hope of a rate cut at the meeting, investors focused on the committee’s update to their statement and the SEP, as well as the committee’s plans for the balance sheet. There was little change to the Fed’s statement from January, but the SEP saw some revisions from December.

Inflation has firmed up notably since the last meeting, with core CPI prints at approximately 0.4% month-over-month in both January and February, and core PCE inflation printing at 0.4% month-over-month in January, substantially stronger than the last few months of 2023. The recent inflation data has unfortunately not helped the FOMC gain confidence that inflation is moving sustainably closer to their 2% target. It appears inflation has dug in for the spring.

Since the January FOMC meeting, incoming activity data has painted a blurry picture for markets. Strong growth in personal consumption appeared to have slowed meaningfully in the last two months, with retail sales delivering two consecutive soft prints. However, with continued strength in services consumption in January and supportive consumption fundamentals, the FOMC has viewed the retail sales data as a soft patch, attributing much of the weakness to January’s weather-related disruptions, troubles in global shipping, and problematic seasonal adjustments. The other components of demand – government spending, housing construction, and nonresidential fixed investment – have remained quite resilient, while inventory investment has seen little of the expected drag that investors may have expected.

While the labor market has continued to remain tight from the standpoint of the Fed, supply and demand conditions have “come into better balance” from its point of view. Payroll employment increases month-over-month have also appeared to indicate some acceleration in the labor market, all of which has likely been supported by the continued increase in labor supply and immigration. The committee expects the rebalancing in the labor market to continue, which should ease the upward pressure on inflation and help to move inflation closer to the committee’s 2% target.

In addition, the Federal Reserve will continue to allow up to $95 billion in assets to roll off its roughly $7.7 trillion balance sheet, allowing $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature month-over-month. The Fed has so far rolled off $1.5 trillion from its balance sheet.

Below are the Fed statement language changes from January:

Source: FOMC as of 3/20/24.

Here are the committee’s March projections for GDP, unemployment, inflation, and the federal funds rate for 2024 through 2026:

Source: Federal Reserve Statement of Economic Projections 3/20/24.

Market Reaction

After the Fed announcement, the 10-year Treasury ended the day lower and finished at 4.27%; short and long rates were mixed for the day.

Source: U.S. Department of the Treasury as of 3/20/24.
10-Year Treasury Yield over the Past 12 Months
Source: FRED as of 3/20/24. U.S. Department of the Treasury as of 3/20/24.

In Conclusion

The second FOMC meeting of the year met market expectations by again keeping interest rates steady, as much of the focus was on the first SEP of 2024 given expectations from the market for a no-move March. While it appeared that many market participants expected the Fed to reduce the number of expected cuts in the year from three to two, the committee held steady with three expected cuts in 2024 but added three cuts to 2026 and reduced the expected cuts in 2025 from four to three. The committee reiterated their stance of waiting for the right time before initiating their first rate cut, and markets took the no news as good news, with equity markets closing in positive territory on the final day of the FOMC meeting. The Dow Jones Industrial Average and S&P 500 Index returned 1.03% and 0.89% for the day and Treasury yields on both the long and front end were mixed with the 10-year and 2-year Treasury spread decreasing to -0.32%.

While the risk rally has started to slow since the last FOMC meeting (high-yield bonds, represented by Bloomberg Corporate High Yield; bank loans, represented by Morningstar LSTA; and equities, represented by Russell 3000 have been up 2.37%, 1.71% and 4.58%, respectively), the committee still seemed optimistic that the winds of inflation are likely blowing toward their 2% target. With expectations for the Fed’s May meeting at 92.3% per the CME Groups Fedwatch Tool for the committee to hold rates at 5.25% to 5.50% for the third time this year, investors should probably not expect much from this very data dependent stance that the committee has taken unless there is truly a material shift in economic data before May 1st. For the time being, investors should try to take advantage of this record high interest rate environment before it becomes a thing of the past.

This information is presented for informational purposes only. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole investment making decision. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are based on current market conditions and are subject to change without notice.