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US Treasury yields had increased ahead of the March Federal Open Market Committee (FOMC) meeting, as some investors expected the committee to adopt a more hawkish tone on the back of mixed economic data. That change in tone did not materialize. Instead, the FOMC appeared to interpret recent data as consistent with its goal of returning inflation to 2%.
March policy statement — Little changed
The FOMC’s March policy statement was little changed from January and continued to characterize the committee’s employment and inflation goals as “moving into better balance.” The February CPI had shown persistent inflation in core services, but a moderation in the rise of shelter costs and food prices. The March policy statement also continued to note that the unemployment rate “remained low” despite the uptick in unemployment to 3.9% in February.
FOMC forecasts — Slightly higher rates in 2025 and 2026
The median FOMC participant’s projection for the policy rate at year-end 2024 was unchanged at 4.625%, though the skew of the distribution remained toward higher rates. The median projections for year-ends 2025 and 2026 increased 25 basis points each to 3.875% and 3.125%, respectively, though the range of these forecasts remains quite wide. The longer-run “dot” also increased modestly from 2.5% to 2.562%.
In terms of economic projections, the median forecast for real GDP moved up to 2.1% from 1.4%. The median forecast for core PCE moved up to 2.6% from 2.4%, and the median forecast for unemployment moved down to 4.0% from 4.1%.
Chair Powell looks through recent high inflation prints
During his press conference, Chair Powell adopted a balanced tone, and repeated that the risks to achieving the committee’s mandate are “two-sided.” He noted, as he has in all recent remarks, that he believes the policy rate is at its peak for the economic cycle, which could be a way of using forward guidance to reduce term premia and rates on longer-maturity securities. He characterized the labor market as strong but noted some signs that it’s slowing, including a decline in job openings and job quits, survey-based weakness, and moderation in wage growth.
Powell acknowledged elevated inflation prints in January and February but discussed them as individual prints on the path to lower inflation. He repeatedly mentioned that seasonal effects may have inflated the January figure. He also expressed confidence that slowing in the shelter component of services inflation will occur, following the leads of private sector measures of rent, which have nearly flatlined. He also noted that the committee was hesitant to change the course of policy in response to individual data points of lower-than-expected inflation last year, and thus that it would be hesitant to overreact to individual data points of higher-than-expected inflation now.
Pace of QT to moderate “fairly soon,” won’t address longer-run committee goals
Powell noted that plans to moderate the pace of balance sheet runoff will be enacted “fairly soon.” He indicated that longer-term goals of the committee, including movement toward a mostly-Treasury balance sheet and move toward shorter maturity securities would not be prioritized in the next change to the balance sheet. Since the fall of 2022, the US Federal Reserve (Fed) has been reducing the balance sheet by reinvesting principal payments over US$60 billion in Treasury securities every month. The Fed has reinvested principal payments over US$35 billion in mortgage securities, though in practice because the Fed holds low-coupon mortgages where prepayments have been low, the principal payments have not hit the US$35 billion cap. Instead, the Fed’s balance sheet has been reduced by about US$20 billion – US$25 billion in MBS securities per month. The pace of balance sheet runoff is twice the pace adopted during the Fed’s first attempt at balance sheet normalization before COVID.
From “abundant” reserves to “ample” reserves
In the context of the balance sheet, Powell noted that the committee hoped to move from “abundant” reserves to “ample” reserves, though it hopes to stay far from the floor of “ample” reserves. He mentioned that he expects reserve balances to decline close to in-line with balance sheet runoff once usage of the overnight reverse repurchase agreements (ON RRP) facility, which has declined rapidly, nears zero. He reiterated that the goal of moderating the pace of balance sheet runoff is to extend its length by avoiding money market disruptions. (Recall that because liquidity is unevenly distributed in the system, money market stress can occur even in an abundant regime paradigm when a limited group of participants are unable to access funds, as was the case in 2019.)
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