Fed Keeps Pace Slow on a Bumpy Road to Lower Rates

The Federal Reserve left the target for its policy rate, the federal funds rate, in the 5.25% to 5.5% range at its latest meeting. However, it did revise up its projections for gross domestic product (GDP) growth and core inflation for this year, and reduced its projections for the pace of rate cuts over the next two years. The result is that the Fed is still expecting a cumulative 75 basis points (0.75%) in rate cuts in 2024, but a slower path of rate cuts in 2025 and 2026. In addition, it signaled that the federal funds rate may not fall to 2.5% in the longer run as previously expected.

The seemingly contradictory signals from the Fed reflect its effort to strike a balance between a relatively strong economy and inflation that is falling more slowly than last year, against a policy rate that is high and could potentially harm the economy. Fed Chair Jerome Powell indicated that the process of getting back to a "neutral rate," one that keeps the economy growing without generating inflation, is likely to be bumpy. To be consistent with the driving metaphor, our interpretation of the message from the Fed is that the direction of travel is lower for interest rates, but the pace and final destination are not clear.

Dot plot signals a slower path of rate cuts

The Federal Open Market Committee's (FOMC) dot plot—which depicts each Fed member's estimate of where the federal funds rate will be in the next few years and the longer run—showed modest changes. The median estimate still shows an expectation of three rate cuts of 25 basis points each in 2024. However, the median estimate for the number of cuts in 2025 declined from 100 basis points to 75, suggesting the cycle could be slower over the next few years.

The FOMC's dot plot as of March 20, 2024

The FOMC's dot plot as of March 20, 2024

Source: Bloomberg, Federal Reserve, 3/20/2024