No surprise that the FOMC left the target rate unchanged at its March meeting

Rob Hogg, CIO of SG Hiscock & Company

No surprise, there is no change

It is no surprise that the FOMC decided to slow the pace of balance sheet runoff (QT) by USD 20 bill per month by lowering the monthly cap for Treasury runoff (from USD 25 bill to USD 5 bill per month).

• One FOMC member dissented, wanting no change in pace.

The median projection in the Summary of Economic Projections (SEP) – “DOT PLOT” – showed an unchanged expected fed funds rate path relative to the December SEP:

• Two cuts expected in 2025 to 3.875% (current futures pricing is very slightly more optimistic at 3.71%, from 3.76% the previous day).
• Two further cuts in 2026 to 3.375%.  

FOMC member forecasts revised to show:

• Higher expected core inflation and unemployment rate forecasts in 2025, and
• Lower GDP growth forecast for 2025-2027.

It is no surprise that the Committee updated the post-meeting statement to note that “uncertainty around the economy outlook has increased.”

 

Market reaction suggested the statement was fractionally less bearish (more dovish) than feared.

On the announcement:

• Bonds rallied (yields down 3-6 bps, slightly more for shorter maturity paper (bull steepening))
• Equities rallied – Interesting that the Russell outperformed other key US equity indices at +1.6%, S&P up 1.1%
• USD softened
• Fed funds futures rallied by 6 bps (December contract), suggesting a slightly more dovish (less hawkish) statement than expected.

 

Solid anecdotes about the US economy suggesting Fed cuts could be further delayed than the market currently expects.

From the Financial Times: BofA Chief Executive Brian Moynihan notes:

• US consumer spending was up so far this year.
• The economy was “solid” despite heightened concerns of a recession.
• “We’re in this classic moment . . . where consumers are saying, ‘I’m getting more pessimistic in some of the surveys and things like that’,”
• “But if you actually look at what they’re doing day-to-day, they continue to spend. Which means the economy ought to be holding up better than people think.”
• Consumer spending patterns were shifting to services and entertainment and away from things like airline tickets.
• “This quarter, $1.5tn will go out of our consumers’ accounts in the economy, 6 per cent more will go out this quarter than last year. Round numbers. So that means it’s solid.”

 

Feedback from another industry participant at a bond broking house in New York, who participates in corporate bond and short-term money market issuance panels, noted that her corporate clients (including the major US banks) are all optimistic. The question is why?

• Clients see a partial renaissance of US manufacturing, increased investment.
• Expecting regulatory change etc.
• Inflation is easing.
• Bank liquidity is supportive of investment activity.

…

 

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