Global Economy Briefs

Fed Puts Rate Cuts on Backburner, but Hikes Unlikely

May 01, 2024

Trusted Insights for What’s Ahead^® ™

• The Federal Open Market Committee (FOMC) kept interest rates steady at their May 1 meeting. Chair Powell said that the Fed is prepared to keep rates higher for longer to confront the sticky inflation rates seen in early 2024, but that additional rate hikes were unlikely. However, he also said that cuts are still a possibility this year.
• We now think the first cut will come in November 2024 and that the Fed will only implement two 25 basis points cuts in 2024.
• On the economy, Chair Powell said GDP growth is solid but that tight monetary policy is having an impact. He said that the inflation seen thus far in 2024 has been higher than expected, but he expects it to gradually ease later this year.
• We anticipate that headline PCE inflation won’t return to 2% until early next year. 
• On the Fed’s balance sheet reduction (known as Quantitative Tightening) Chair Powell said that the Fed will move forward with its plan to slow the pace of decline of its security holdings starting in June. Doing so, he said, will facilitate a smoother transition to a terminal balance down the road.

Highlights

On the economy, The FOMC statement said that economic activity has continued to expand at a solid pace but the outlook is uncertain. Additionally, the statement said that in recent months “there has been a lack of further progress toward the Committee's 2 percent inflation objective.” Chair Powell expects inflation rates to ease over the course of the year as monetary policy tightness continues to weigh on the economy and pandemic-related price shocks continue to dissipate. He specifically mentioned the role that shelter disinflation will play in the coming progress.

On interest rates, after implementing 525 basis points of interest rate hikes since early 2022, the FOMC elected to hold the federal funds rate window at 5.25 – 5.50% in May. Rates remain deep in ‘restrictive’ territory. Chair Powell said that the FOMC believes that monetary policy tightness is sufficient to bring inflation down to the Fed’s 2% target over time. He said that it is “unlikely that the next policy move will be a hike.” However, he could not say whether rate cuts would occur in 2024, noting that “there are paths to cutting and paths to not cutting. It’ll depend on the data.” From the Conference Board’s perspective, we are pairing back our Fed Funds forecast to just two 25 basis point rate cuts in the last quarter of the year.

Regarding the Fed’s balance sheet, after months of discussion, the Fed announced changes to its balance sheet reduction program (known as Quantitative Tightening). The pace of reduction will decelerate starting on June 1st, according to Powell. With the runoff of treasuries falling from $65 billion to $25 billion per month, we project that the balance sheet will fall to $6.5 trillion in July 2025 and $6.0 trillion in March 2026. Agency mortgage backed securities reductions were not modified and were held at $35 billion per month. For a background on the Fed’s balance sheet see our recently published guide, or delve into the specifics of the ongoing quantitative tightening program in our new report.

Today’s actions were unanimously approved by the members of the Federal Open Market Committee.