What will the Fed’s next steps be?
Moves and scenarios on the Fed. The point by Tiffany Wilding, Managing Director and Economist of PIMCO.
The FOMC chose to keep interest rates at the 5.25-5.5% level. The statement and projections were largely in line with expectations; while the rate forecast for 2024, a short-term road map of what the Fed is considering regarding future interest rate moves, remained unchanged, showing 75 basis points (bps) of cuts (in line with expectations, but less hawkish than feared). Changes to economic projections were also minimal, with the exception of a higher-than-expected upward revision to growth for 2024. In particular, the core PCE (Personal Consumption Expenditures, the Fed's preferred inflation indicator) was also revised upwards.
WHAT IS THE EFFECT OF THE FED'S DECISION?
Overall, we believe the updated projections show a Fed that is less than willing to begin the process of rate normalization in the coming months, while at the same time grappling with broader questions about inflation and the sensitivity of the US economy to rates interest rates, which will determine the pace of cuts over the next year or two. As Fed officials continue to expect core PCE to remain in the “two-and-something” range, we continue to forecast a 75 basis point benchmark for cuts in 2024 starting in June, but we believe short-term risks term are oriented towards a lower number of cuts than currently expected by Fed officials.
WHAT WILL THE FED'S NEXT STEP BE?
Federal Reserve Chair Jerome Powell confirmed that “fairly soon” the Fed will “taper and extend” its balance sheet, which we expect will happen as Treasury outflow caps gradually reduce. We now expect the Fed to make this announcement as early as the May FOMC meeting, ahead of our previous forecast of an announcement in June. Powell also signaled a high threshold for raising rates, downplaying inflation – defining the recent inflationary reacceleration as "shocks" – and underlining the resilience of the labor market.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/quali-saranno-i-prossimi-passi-della-fed/ on Sun, 24 Mar 2024 06:18:52 +0000.