Fed Preview: Forecasts from 15 major banks, risk of a hawkish shift in the dot plot

We expect the FOMC will leave the target rate for fed funds (FFR) unchanged. Despite a relatively brisk start to 2024, we aren’t expecting any material changes to the FOMC’s current profile of moderating growth, gently rising unemployment and a gradual yet persistent return to target inflation. We acknowledge the possibility of a modest up shift in the dot plot. Discussions on what to do with quantitative tightening (QT) will begin. Recent Fed rhetoric suggests it’s unlikely any specific announcement will come. We think that could come from the May meeting onwards.

The Fed is unlikely to change its key interest rates, leaving the target range for Fed Funds at 5.25%-5.50% (where it has been since July 2023). The Fed is also likely to reiterate that it does not consider a rate cut appropriate until it has gained greater confidence that inflation is moving sustainably towards 2%. We assume that the dot plot will provide for three rate cuts in 2024, as in the last update in December.

We expect no changes to the Fed Funds rate or QT at this meeting. However, the Fed will likely need to revise its growth and inflation projections higher for 2024. This could lead to a median FOMC dot plot that shows only two rate cuts this year compared to the latest projection for three rate cuts, made in December 2023.

We do not expect the Fed to make monetary policy changes in its March meeting. Besides the obvious focus on rate cut timing cues, we will keep an eye on the updated rate and economic projections as well as more detailed discussion on QT. We think the Fed will cut rates for the first time in May and start to gradually phase out QT only from September. 2024 GDP forecast is set to be revised higher, but we think ‘dots’ will still signal three rate cuts for this year as a whole.

We expect the Fed to keep policy on hold at the March FOMC meeting. The Committee will also update its quarterly projections, and we expect this to show the median FOMC member still expecting three rate cuts this year. Chair Powell is likely to maintain the cautiously hawkish tone of recent remarks and not seek to rock the boat, as the Fed is likely comfortable with current market pricing for rate cuts. Powell signalled at the January meeting that the FOMC would discuss the winddown of QT at the March meeting. Given that use of the Overnight Repo Facility has stabilised recently, it is probably too soon for the Fed to announce a winddown plan at this meeting, but Powell is likely to confirm that this is now being actively worked on.

Some people think the Fed may need to hike rates further, but we don’t see this happening. We think the next move is a cut, most likely in June. At the December forecast update, the Fed signalled they felt three 25 bps rate cuts would be the most likely path forward for 2024 with a further 100 bps of cuts pencilled in for 2025. We expect a similar set of projections at the March FOMC meeting with the messaging indicating that the Fed is inclined to cut rates later this year, but they need to see more evidence to justify that action. We expect 125 bps of cuts this year, starting in June, with a further 100 bps in 2025 as hopes rise for a soft landing for the economy.

The FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50%, with Chair Powell likely continuing to argue for patience regarding the Committee's next policy steps amid the recent firming of inflation. We also look for the Fed to maintain its median projection for three cuts this year and for the release of preliminary details about QT plans. Risk-reward under our baseline of the Fed's 2024 dot remaining unchanged in a market that is net long the dollar is for USD weakness.

The FOMC needs to see more data to gain confidence that inflation is heading sustainably toward its 2% target. We continue to pencil in the first rate cut in June. However, the risk that the Fed will start later than June, rather than before June (= May), has increased. Once started, we expect the Fed to continue with one cut of 25 bps per quarter. However, since our new economic forecasts assume a Trump victory in November, leading to a universal import tariff, we expect inflation to rebound in 2025. This is likely to cause a pause in the Fed’s cutting cycle during the course of next year.

We expect only minor revisions to the meeting statement that saw an overhaul last meeting. With regards to the SEP, the growth and unemployment forecasts are unlikely to change but the 2024 inflation forecasts potentially could. We expect the Fed to revise up their 2024 core PCE inflation forecast by a tenth to 2.5%, although they see meaningful risks that it gets revised up even higher to 2.6%. A 2.5% core PCE reading would allow just enough wiggle room to keep the 2024 fed funds rate at 4.6% (75 bps of cuts). However, if core PCE inflation were revised up to 2.6%, it would likely entail the Fed moving their base case back to 50 bps of cuts, as this would essentially reflect the same forecasts as the September 2023 SEP. 

We do not expect any policy changes at this meeting. We now believe the Committee will wait until its June 12 meeting before reducing its target range for the federal funds rate by 25 bps. We then look for the FOMC to cut rates by 25 bps at each of its meetings in July, September and December.

The Fed is widely expected to stand pat on the fed funds range for a fifth consecutive meeting on Wednesday. But any shift in the monetary policy statement language will be closely watched after two straight months of upside surprises on inflation.

The FOMC is widely expected to leave its key policy rates unchanged for the fifth straight meeting. Since January, policymakers have been waiting for ‘greater confidence that inflation is moving sustainably toward 2 percent’ and recent data is unlikely to have provided the FOMC much assurance. As such, don’t expect the easing bias in the rate statement to become any more pronounced. Markets will be most closely watching the ‘dot plot’ to see whether policymakers dial back the amount of expected easing for 2024. In December, 75 bps of cuts were signaled but the distribution was skewed towards less easing. Given recent inflation developments, there’s a reasonable chance some dots could move higher, bringing the median up with it.

While markets are increasingly pricing a more hawkish Fed following stronger-than-expected inflation, Chair Powell is likely to emphasize slowing YoY core PCE inflation and restate that the Fed is ‘not far’ from achieving the level of confidence necessary to begin lowering rates. We expect a largely unchanged SEP. Core PCE at the end of 2024 could be nudged higher to 2.5% from 2.4%. Most importantly, median dots are likely to remain unchanged. The FOMC will also discuss balance sheet reduction in depth which might result in some principles being published on how the Fed plans to taper and then eventually end balance sheet reduction.

The FOMC convenes this week against the backdrop of mounting inflation pressures and rising concerns over the feasibility and timing of interest rate reductions. The Fed has ample time to assess the situation, and we expect no policy change in March. Economic indicators in the coming months will play a decisive role in determining whether mid-year rate cuts are a viable option. The Fed's new dot plot may prove less dovish than the 75 bps in rate cuts suggested in December.

The funds rate will be left unchanged, and Powell ought to avoid giving any definitive signal on when the first cuts will arrive. We’ll concede that recent data on inflation hasn’t been friendly to our forecast for 100 bps of cuts in the latter half of the year, and we’ll need to see some softening in jobs, wages and underlying inflation in the coming months to stick with that view. While it’s a close call, with some risk of a more hawkish turn to only 50 bps of easing, we see the Fed just hanging on to its median projection for three cuts in 2024, and the median call for 2025 also looks likely to be little changed, with the individual dots still widely dispersed. Median forecasts for growth, inflation and unemployment for this year could shift by a decimal place or two here and there, which won’t be material. If so, the biggest change could be in the ‘long term’ outlook for rates, typically viewed as the Fed’s assessment of where neutral will lie. With the economy showing resilience to rates above 5%, the long-term projection will likely move higher, with 2.75% or even 3% now looking like more plausible outcomes.