Fed Holds Rates Steady, Signals Less Aggressive Rate-Cutting Ahead

Fed Holds Rates Steady, Signals Less Aggressive Rate-Cutting Ahead 

No adjustments were made to interest rates, and there were minimal changes in the statement. However, there was an upgrade in projected economic growth. Notably, the Dot-Plot provided significant signals, with 2024 expected to remain unchanged (with 3 rate cuts), but projections for 2025, 2026, and beyond indicate higher rates with fewer cuts. In 2024, the median dot remained at 3 cuts, but there were some shifts in the composition: 2 officials didn't foresee any cuts, 2 predicted one cut (an increase from December), 5 saw two cuts (unchanged), 9 anticipated three cuts (up from 6 in December), and 1 expected four cuts (down from five). There was only one voter who positioned between 50bps and 75bps in cuts for 2024. Additionally, there's an acknowledgment of a higher 'neutral' rate and a potential future adjustment of the inflation target.

Since the previous FOMC meeting in January, bitcoin has seen significant gains while bonds have suffered. Despite this, gold and stocks have performed well, even with a modest rise in the dollar. Stocks have rallied despite reduced expectations for rate cuts in 2024, largely due to consistent efforts by various Fed speakers to downplay these expectations, showcasing a disconnect between market behavior and rate-cut projections. Furthermore, there have been disappointing US macro data alongside soaring inflation expectations, raising concerns about stagflation.

As for the Fed's actions, there were no rate cuts or hikes, but the focus was on the Dot-Plot. The projections suggest 75 bps of rate cuts in 2024, with the median rate forecast for 2025 rising slightly. While the Fed kept its median dot at 3 cuts for 2024, there's a less aggressive stance on future rate-cutting beyond that year. Additionally, the Fed anticipates higher economic growth this year, with a lower unemployment rate and inflation reaching the target later than previously expected.

The Dot-Plot presented a more hawkish outlook compared to December's projections, with 2024 remaining steady at 3 cuts. However, Fed Chair Powell emphasized that the Dot-Plot doesn't constitute a concrete plan. He also hinted at a slowdown in balance sheet reduction and dismissed recent inflation spikes as potentially seasonal. Powell stressed the need for cautious decision-making, considering both inflation and employment risks.

Despite these statements, Powell's comments were interpreted as dovish, leading to market optimism. Rate-cut expectations for 2024 actually increased, sending assets higher and the dollar lower. This resulted in record highs for gold, Bitcoin, and stock markets. Treasury yields initially rose on the Dot-Plot news but later fell due to Powell's dovishness, prompting significant changes in the yield curve. However, despite the positive market response, concerns about inflation and political uncertainties remain.