March Madness, Fed Version

During a press conference on March 20th, Jerome Powell discussed expectations for interest rates, revealing no immediate plans for cuts but acknowledging a possible reduction in the future. The Federal Reserve's projections now anticipate three interest rate cuts in 2024, driven by the desire to support a healthy job market and economy despite ongoing inflation above the 2% target. This marks a slight adjustment from December's forecast of four cuts. The Fed expects core inflation to be at 2.6% by the end of 2024, a slight increase from the previously projected 2.4%.

Despite these inflation concerns, the Federal Reserve also plans on observing fluctuations within the labor market before starting to reduce rates. The objective is to witness cooling in the labor market to alleviate the burden of elevated rates on consumers. Currently, ten of the Fed's nineteen officials foresee the policy rate decreasing by at least three-quarters of a percentage point by year-end, implying short-term rates slightly above 4%.

The economy's resilience, as evidenced by GDP growth, also factors into these considerations. On March 26, the Atlanta Fed verified their prediction of the robustness in economic growth, with a forecast of 2.1% GDP growth in the first quarter—a figure elevated by 10 basis points than the previous year and indicative of a resistant nature. The final quarter of 2023 saw a GDP growth rate of 3.1%, contributing to an annual growth of 2.5%.

Complicating the economic landscape are rising oil prices and a slower-than-expected decline in housing costs, exacerbated by a nationwide housing shortage and an affordability crisis fueled by higher mortgage interest rates. These dynamics further introduce uncertainty regarding the likelihood of rate cuts within the year. While economic indicators may not strictly justify a reduction, political pressures suggest the necessity of a rate cut. Powell's navigation of these complex demands illustrates an effort to balance economic imperatives with political expectations, particularly considering the sticky inflation.

The CPI update on April 10th for the month of March will be pivotal in offering insights into rate cut scenarios. Despite not providing any definite assurances during press conference, the U.S. stocks continue to see gains as the U.S. dollar weakens against other currencies. This indicates the market’s optimism about the Fed's cautious yet supportive stance towards economic growth and inflation management.