Fed raises GDP and inflation outlook, while keeping rate cut forecast

Despite optimistic projections for economic growth, Federal Reserve members anticipate three interest rate reductions in 2024.

The Federal Open Market Committee (FOMC) forecasts a median Federal funds rate of 4.6% in 2024, implying three 0.25% cuts.

This aligns with the December estimate, but contrasts with the more optimistic growth outlook for 2024.

However, recent inflation data has tempered expectations that inflation is under control, contributing to the decision to maintain rate cut projections.

Core PCE inflation projections have been revised upward to 2.6% in the March forecast.

Despite the projected cuts, the median projection for the fed funds rate in 2025 has increased to 3.9%, suggesting a less aggressive approach.

Additionally, the long-run projection for the benchmark rate has also risen.

Fed Chair Jerome Powell acknowledges that recent inflation reports raise concerns but maintains that the overall trend points to a gradual decline towards the Fed’s 2% inflation target.

The dot plot, which summarizes the individual predictions of FOMC members, indicates a more unified view compared to December.

While some members previously anticipated zero cuts or six reductions, the most aggressive forecast now stands at four cuts.

Traders and analysts note that the FOMC’s decision to maintain rate cut projections, despite the improved economic outlook, suggests that the Fed remains vigilant about inflation.

Ian Lyngen of BMO Capital Markets emphasizes that the Fed is dismissing the recent uptick in inflation.

Overall, although the economic outlook is improving, the Fed remains cautious about inflation and anticipates a gradual reduction in interest rates throughout 2024.