Despite strong economy, Fed still expects three rate cuts in 2024

The Federal Reserve (Fed) has recently announced its expectation to implement three rate cuts in 2024. This decision comes as a surprise to many, considering the current state of sticky inflation and a stronger economy. The Fed's move suggests that it is taking a cautious stance toward the economy and its potential risks.

                        Despite strong economy, Fed still expects three rate cuts in 2024

WASHINGTON, March 20 (Reuters) - The Federal Reserve held interest rates steady on Wednesday, but policymakers indicated they still expect to reduce them by three-quarters of a percentage point by the end of 2024 despite stodgier expected progress towards the U.S. central bank's 2% inflation target.

The Fed's new policy statement described inflation as remaining "elevated," and updated quarterly economic projections showed the personal consumption expenditures price index excluding food and energy rising at a 2.6% rate by the end of the year, compared to 2.4% in the projections issued in December.

Despite signs of robust economic growth, inflation has proven to be stubbornly persistent. Over the past year, key inflation indicators have shown an upward trend, exceeding the Fed's target of 2%. This has raised concerns about the potential long-term effects of inflation on the economy. However, the central bank continues to maintain its forecast of three rate cuts in 2024.

Nevertheless, 10 of the Fed's 19 officials still see the policy rate falling by at least three-quarters of a percentage point by the end of this year, a median view first set in December and maintained despite recent stronger-than-expected inflation.

U.S. stocks extended their gains following the release of the Federal Open Market Committee's policy statement while the U.S. dollar ,slipped against a basket of currencies. U.S. Treasury yields fell.

Furthermore, the central bank's decision is also influenced by global economic trends. While the United States has experienced a relatively stronger economic rebound, other major economies are lagging behind. This divergence in economic performance poses a risk to the overall global economy. By implementing rate cuts, the Fed hopes to support global economic stability and minimize the potential spillover effects.

It is important to emphasize that the Fed's decision to proceed with rate cuts does not imply a lack of confidence in the economy's overall strength. Rather, it reflects a prudent approach to manage potential risks and steer the economy towards a sustainable and balanced growth path.

"The May meeting is not live for a cut, barring a financial accident, as the Committee continue to seek further confidence that inflation is returning to target before firing the starting gun on the easing cycle," said Michael Brown, a market analyst at Pepperstone.

Back in December, eleven officials had seen three quarter-percentage-point cuts on tap for the year, and the new policy view came alongside an upgraded outlook for the economy. Growth is now seen at 2.1% for the year compared to just the 1.4% projected in December, while the unemployment rate is seen ending the year at 4%, lower than the 4.1% anticipated in December and barely changed from the 3.9% jobless rate recorded in February.

LONGER-RUN RATE HIGHER

One key measure, the longer-run policy rate, was moved higher by a tenth of a percentage point, from 2.5% to 2.6%, reflecting the views of some Fed officials that the economy can support higher interest rates overall in the future.

The Fed kicked off an aggressive monetary policy tightening cycle two years ago in response to a surge in inflation that would eventually hit a 40-year peak, but it has kept its policy rate in the 5.25%-5.50% range since last July.

The latest projections show the median policymaker expects the Fed's benchmark overnight interest rate to fall three-quarters of a percentage point in 2025, less than the 1 percentage point projected in December as part of a slightly slowed rate cut path, and by three-quarters of a point in 2026 as well, the same as anticipated previously.

"Economic activity has been expanding at a solid pace. Job gains have remained strong and the unemployment rate has remained low," the Fed said in its unanimously approved statement after the end of a two-day meeting.

The statement also repeated that officials are still seeking "greater confidence" in a continued decline of inflation before they begin cutting interest rates, language adopted at the Fed's Jan. 30-31 meeting that is likely to stay in place until just before the first rate reduction.

Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the policy statement and projections.

Investors ahead of the meeting had settled firmly on an anticipated June start to rate cuts. That view was largely reinforced by the outcome of the meeting, but it also leaves the median rate outlook near a tipping point, a fact that could give outsized influence to upcoming inflation reports.

Critics argue that the Fed's actions may fuel further inflationary pressures and undermine the effectiveness of its monetary policy. They argue that the central bank should instead focus on normalizing interest rates to mitigate the risk of an overheating economy. However, proponents of the Fed's decision stress the need for a cautious approach given the uncertainties and the potential adverse impact on economic growth if premature tightening were to occur.

In conclusion, the Federal Reserve remains committed to its plan of implementing three rate cuts in 2024, despite sticky inflation and a stronger economy. The decision highlights the central bank's cautious stance towards the economy and its ongoing efforts to balance growth with managing potential risks. Time will tell whether the Fed's approach proves effective in sustaining the economic recovery and maintaining price stability.

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