Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.
In this article we review:
Summary of the Fed's March meeting and why markets reacted favorably
Why we believe the Fed conveyed a less hawkish tone than most had expected
Overview of the Fed's dot plot representing future rate expectations
Post-meeting commentary from Fed Chair Jay Powell regarding inflation, the job market, and quantitative tightening
Despite the Federal Reserve’s expected decision to leave the federal funds rate unchanged at a target range of 5.25%–5.50%, markets reacted favorably to the Fed’s March meeting. Concerns of a more hawkish tone did not come to fruition and post-meeting comments by Chair Jay Powell seemed to reiterate the prospect of summertime rate cuts. Given this development, we believe the following points are important for investors.
Dot plot conveys welcome news. Markets seemed to cheer that the Participants’ Assessment of Appropriate Monetary Policy, better known as the dot plot, remained basically unchanged from its previous December survey. Specifically, regarding year-end 2024, Fed members stayed at a median fed funds expectation of 4.6%, reflecting three quarter-point rate cuts over the next nine months. Prior to the meeting, the consensus appeared to have turned toward the anticipation of a more hawkish outlook, along the lines of two quarter-point rate cuts between now and year-end rather than three. However, this was not the case, providing relief to the markets.
Improving economic outlook. The Fed held firm with its dot plot of three rate cuts for this year, while also upgrading its view of the economy. This included raising forecasts for cumulative 2024 gross domestic product growth to 2.1%, up from 1.4%, translating into a more favorable perspective of stronger economic growth without a corresponding adjustment to rate expectations for the remainder of the year.
Potential slowing of quantitative tightening (QT) regarding the Fed’s balance sheet. In his post-meeting press conference, Chair Powell made mention for the first time of potentially slowing the pace of QT on the Fed’s balance sheet, in stating, “The general sense of the committee is that it will be appropriate to slow the pace of runoff pretty soon.” The Fed’s current QT program, in place since June 2022, consists of monthly principal roll off of $95 billion ($1.14 trillion annually) in Treasury bonds and mortgage-backed securities. While there was no mention of specific timing or dollar amounts pertaining to slowing the runoff, the fact that reducing QT is now under discussion was well received by the markets.
Job market commentary. During the press conference Chair Powell also made asymmetrically favorable comments about the job market. The first being, “Unexpected weakening in the labor market could warrant a policy response.” This was followed moments later by, “A strong job market would not be reason in and of itself to hold off on cutting rates.” Taken together, we believe the markets interpreted these comments to be that a slowing job market could be a contributing factor toward reducing rates, however a continuing strong job market would not in isolation be a reason to prevent cutting rates.
Fed taking a longer-term view on recent inflation data. Chair Powell did not seem overly concerned about recent January and February higher-than-expected inflation reports. In his words, “I think they have not changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.” This was in reference to the longer-term trend since inflation peaked during 2022 that has seen the core consumer price index decline from a year-over-year reading of 6.6% to 3.8% and the Fed’s preferred metric of core personal consumption expenditures fall from 5.4% to 2.8%.
In summary, while it is always important not to place disproportionate focus on any single Fed meeting, the overall mosaic of this March gathering seems to have played out more dovish than most expectations. Of course, as more economic data rolls in, the upcoming summer meetings will likely carry a good bit of drama as well. However, for the time being, the prospect of positive economic growth and upcoming Fed easing, a combination the market has seemed to like a good bit of late, appears to still be very much on the table. With this in mind, we maintain our forecast of a year-end 2024 fed funds target range of 4.25%–4.50% and an S&P 500® price target of 5,500.
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