Interpreting the Fed’s decision is more complicated than what the market wanted to take away. The good news is that Fed officials maintained their forecast of three interest rate cuts this year and slowed the pace of reducing their balance sheet, suggesting they are not alarmed by the recent rise in inflation. The FOMC unanimously decided to leave the federal funds rate target in a range of 5.25% to 5.5%, the highest since 2001, for a fifth consecutive meeting.

Jerome Powell largely disregarded recent data, which showed a slight uptick in inflation in recent months. However, he stated that the data supported the Fed’s cautious approach, adding that policymakers were still seeking additional evidence that inflation was heading toward their 2% target. In other words, a cut in June will heavily depend on upcoming data and is not a given as investors currently price it.

The statement following the meeting was nearly identical to January’s, confirming and maintaining that rate cuts would only be appropriate once officials were more convinced that inflation was sustainably moving toward their 2% target.

While policymakers forecast the federal funds rate to reach 4.6% by the end of 2024, unchanged from previous data, expectations for next year’s rates were raised to 3.88% from 3.63% previously (+0.25%), indicating fewer rate cuts. The “dots,” or FOMC members’ projections, showed that ten officials projected three quarter-point cuts, while nine projected two or fewer.
Although projections do not constitute a predetermined plan and individual forecasts are subject to change based on available data on inflation and the labour market, this signals that committee members are less dovish.

Policymakers also slightly raised their forecasts for long-term rate stabilization, increasing their median estimate from 2.5% to 2.56%, signalling that rates must remain high longer.

The Fed updated its projections for inflation and economic growth for 2024, increasing its forecast for core inflation to 2.6% from 2.4% and raising the growth forecast to 2.1% from 1.4%. It also slightly lowered its unemployment rate forecast from 4.1% to 4% for 2024.