The Federal Open Market Committee’s (FOMC) recent rate decision and release of the Summary of Economic Projections (SEP) have provided insight into the future trajectory of monetary policy, prompting Wall Street analysts to assess the implications for the economy and financial markets.
Key takeaways from the FOMC meeting and Chair Jerome Powell’s press conference have sparked debate among analysts regarding the timing and pace of potential rate cuts. While Powell did not rule out a rate cut in May, there is divergence among analysts regarding the number and timing of rate cuts anticipated for 2024. While the median dot on the dot plot indicates three rate cuts in 2024, some analysts maintain expectations for just two cuts, citing the Fed’s sensitivity to inflation data and the possibility of upside surprises.
The upward adjustment in expected GDP growth outlined in the SEP has led to discussions about the Fed’s optimistic outlook, particularly in the face of recent hot inflation data. Analysts suggest that the Fed’s optimism may stem from positive supply-side developments, including robust labor supply and healthy productivity growth.
Analysts also scrutinize the dot plot for clues about the pace of rate cuts, with many noting a potential pattern consistent with gradual reductions at steady intervals. Additionally, revisions to longer-run dots and expectations for fewer rate cuts in 2025 suggest a potentially higher terminal rate compared to pre-pandemic levels.
Regarding the balance sheet, Powell indicated that the FOMC would begin slowing the pace of asset runoff “fairly soon,” prompting speculation about the timing of this decision. Analysts anticipate a potential slowdown in quantitative tightening (QT) starting in May or June, signaling a shift in the Fed’s approach to managing its balance sheet.
Overall, the recent FOMC meeting and subsequent analysis by Wall Street analysts highlight ongoing uncertainty and divergence of views regarding the future path of monetary policy, reflecting the complex economic landscape and evolving dynamics shaping the global economy.