Expectation of 3 rate cuts for this year still lingers

The Federal Reserve (FED) made the unanimous and widely anticipated decision to once again leave the target range for the federal funds rate unchanged at 5.25% – 5.50%, its highest level in the last 22 years. Since July 2023, the FED has not changed the target range. This decision comes in the context of accelerating inflation, which reached 3.2% annually in February (3.8% annually excluding the most volatile components such as food and energy), along with an increase of 275,000 jobs (versus 198,000 estimated).

In this context, the statement described that the latest employment indicators have shown solid performance, while inflation remains elevated despite its notable reduction over the last year. Additionally, the statement reiterated that the Committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%, while it will continue to monitor the implications of incoming information for its future decisions.

On the other hand, the FED updated its macroeconomic perspectives, reaffirming that there will be 3 rate cuts of 25 basis points (bps) in the remainder of the year, unchanged compared to December’s estimate. This would bring the federal funds rate to 4.6% from its current average level of 5.4%. By 2025, it could end at 3.9% from 3.6%. As for the economic scenario, the new estimate underwent a notable upward revision, with GDP growth of 2.1% from the previously estimated 1.4% by the close of 2024. By 2025, strength could be maintained with growth of 2% from the 1.8% previously forecast. These scenarios place the economy at growth very close to its long-term potential of around 2%. The unemployment rate remained unchanged for both years at around 4%. However, estimated core inflation (excluding volatile components such as food and energy), as measured by the Core PCE, rebounded slightly to 2.6% from 2.4%, while the estimate for 2025 remained at 2.2%.

During his press conference, Jerome Powell confirmed that the federal funds rate has peaked. Additionally, he reaffirmed the commitment to return inflation to its long-term target of 2% and expressed confidence that eventually we will begin to see less pressure related to services and housing costs, which have been affecting core inflation. However, Powell noted that the timing of when this may occur is difficult to estimate.

Economic projections of Federal Reserve (March vs. December)

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Source: Federal Reserve

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