For a fifth consecutive meeting, the US Federal Reserve’s policy committee held benchmark borrowing costs at a 23-year high, but policymakers raised inflation forecasts and lowered the number of rate cuts expected in the years ahead – suggesting that the risk of a re-acceleration in price growth continues to take precedence over signs of incipient economic weakness in driving the central bank’s reaction function. 

In a broadly unchanged statement, the Federal Open Market Committee said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is expected to end the year at 4.6 percent –  a level that implies three 25-basis point reductions this year, very closely aligned with the number currently priced into swap curves. Perhaps more meaningfully, the longer-term forecasts were raised, with the policy rate seen sitting at 3.9 percent at the end of 2025, up from 3.6 percent previously, and the “longer run” estimate rising to 2.6 percent from 2.5. 

Under the updated forecasts, the core personal consumption expenditure price index is seen rising 2.6 percent this year, up from 2.4 percent in December. Unemployment is expected to hit 4.0 percent by the end of 2024, just below the 4.1 percent under the previous projection. Growth expectations were revised sharply upward to 2.1 percent from the previous 1.4-percent estimate, with momentum seen decelerating only slightly toward 2.0 percent in 2025. 

Ahead of the decision, markets were assigning near-60-percent odds to a rate cut at the central bank’s June meeting, and those odds are now firming, helping to weaken the dollar and short-term Treasury yields. We’re not convinced this dynamic will hold – on balance, the rise in inflation, growth, and rate projections out across the forecast horizon is unmistakably hawkish, and could ultimately provide renewed lift to the dollar. 

Chair Jerome Powell’s words during the post-decision press conference will be nonetheless be tightly scrutinised for evidence of a more dovish bias, with the risk of a market reversal looming large. During Congressional testimony in early March, Powell noted that it would be appropriate to lower interest rates when the Fed was confident that inflation was on a sustainable trajectory toward target, adding, “and we’re not far from it.”

Federal Reserve projections for Fed Funds Rate, December 2020 – March 2024