Balancing Inflation and Interest Rates: Federal Reserve Holds Steady

As widely expected, the Federal Reserve has opted to maintain interest rates unchanged, keeping the federal funds target rate within the range of 5.25% to 5.5%. The latest FOMC Statement is almost an identical copy of the January 31st release. The only difference being “Job Gains have remained strong,” compared to the verbiage “Job gains have moderated.” With that said, we are now nearly four months into 2024, and the market expectation of rate cuts continues to be pushed back further and further. As seen below, on January 15th, 2024, the World Interest Rate Probability for the United States indicated that there was a 74.5% chance of a March rate cut priced into the market. This rate cut is now predicted to happen on July 31st.

World Interest Rate Probability (source: Bloomberg) January 15th, 2024.

Accompanying the FOMC statement, the Federal Reserve has unveiled updated quarterly economic projections. The median forecast suggests borrowing costs reaching 4.6% by December 2024, indicating three quarter-point rate cuts for the year. Moreover, they anticipate elevated interest rates at 3.9% in 2025 and 3.1% in 2026, driven by projections of robust future growth and a resilient labour market.

The Federal Reserve has also substantially increased their gross domestic product (GDP) growth projections for the current year to a 2.1% annualized rate, representing a significant uptick from the 1.4% estimate provided in December. Concurrently, the forecasted unemployment rate experienced a slight decline to 4%, while core inflation, measured by personal consumption expenditures, rose to 2.6%, marking a 0.2 percentage point increase from earlier projections, though remaining slightly below the recent level of 2.8%.

Federal Reserve Economic Projections (source: https://www.federalreserve.gov/newsevents/pressreleases/monetary20240320b.htm)

Amidst ongoing signals from the Federal Reserve indicating potential rate cuts, our economy grapples with persistent inflation. In February 2024, the annual inflation rate in the US unexpectedly rose to 3.2%, up from 3.1% in January, exceeding forecasts of 3.1%. This uptick was primarily attributed to a smaller-than-expected decrease in energy costs.

US Inflation Rate (source: https://tradingeconomics.com/united-states/inflation-cpi)

The Federal Funds rate has been maintained at a steady level since July 2023. According to the recent FOMC statement, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." This raises the question: When can we anticipate observing signs of inflation progressing steadily towards the 2% target?

The next Federal Reserve rate announcement is May 1st, 2024.

If you have any questions about today’s Market Update, feel free to call us at 604-643-0101 or email cashgroup@cgf.com .