The US Federal Reserve kept rates and expects stronger economic growth this year

Following the results of the two-day March meeting that ended on Wednesday, the US Federal Reserve kept the rate at 5.25–5.5%. At the same time, the regulator revised its assessment of the state of the economy, pointing to strong growth in the number of jobs, which prevents the cooling of the labor market: demand for workers still exceeds supply, noted Fed Chairman Jerome Powell. The US GDP growth estimate for this year was also raised by half, from 1.4% to 2.1%. As a result, market expectations for a rate cut shifted to the second half of the year – earlier analysts did not rule out the possibility of easing policy even at the meeting on Wednesday.

Following the results of the March 2024 meeting, the US Federal Reserve Open Market Committee did not change the rate, keeping it in the range of 5.25–5.5%. Last time bid increased in July – since then, every Fed meeting has been accompanied by a comment from the regulator that further steps on the rate will depend on incoming data. This time Fed Chairman Jerome Powell repeated wording that the rate was likely at its peak, but, regarding the prospect of a rate cut, only indicated that this would be appropriate “at some point during the year.” The Fed also again adjusted its assessment of economic activity, indicating that not only is it expanding at a “significant pace,” but job growth remains “strong” (at the end of January, the regulator included in its statement an indication of a slowdown in this process). The wording that the risks of achieving employment and inflation targets are “shifting towards a better balance”, which also appeared at the end of the previous meeting, was retained. To start lowering the rate, the Fed will need confidence that inflation is approaching the target of 2%.

Market participants have already adjusted their expectations of rate dynamics, which previously sharply diverged from the forecast of committee members: a rate reduction was expected both at the March meeting and at subsequent ones – until the rate drops to 4–4.25%. Now the market is waiting for the first rate cut in September.

Note that the updated dot plot with the committee members’ forecasts for the rate provides for its reduction to a level of 4.5–4.75% this year and to a level below 4% next year.

At the same time, compared to December, the average rate expected by the Fed was increased from 4.7% to 4.8%.

The Fed’s updated forecast for the US economy now assumes faster growth in 2024 – this estimate has been raised from 1.4% to 2.1% this year and from 1.8% to 2% in 2025. As a reminder, at the end of 2023, growth was 3.1%, exceeding expectations. Estimates for the expected unemployment rate have remained almost unchanged – 4% this year (versus 4.1% in December) and 4.1% next year. According to Jerome Powell, demand still exceeds supply – market rebalancing will continue, which will ease pressure on prices, but an unexpected deterioration in the situation could also affect the regulator’s policy.

The forecast for the consumer spending deflator, which the Fed is guided by, was kept at 2.4% in 2024 (in 2025 it was increased from 2.1% to 2.2%), but the estimate of expected core inflation ( excluding energy and food prices) increased from 2.4% to 2.6%. Actual inflation in the US is also in no hurry to decline, as the market expected: price growth in February was 0.4% versus 0.3% in January – in annual terms, inflation increased by 3.2% (as in January), while the contribution of food was positive, energy – negative (in February, however, this increase was positive), core inflation was 3.8% (3.9% in January) – but its monthly growth remained the same as the month earlier (plus 0.4%). At the end of January, the consumer expenditure deflator showed an increase of 2.4% against 2.6% in December, and excluding energy and food, the indicator slowed down from 2.9% to 2.8%. Unemployment rose to 3.9% in February, but the number of newly created jobs – 275 thousand for the month – was too high to cool the labor market.

A rate cut in June will require a faster slowdown in inflation, according to Capital Economics.

Chief macroeconomist of Ingosstrakh-Investments Management Company Anton Prokudin notes that the Fed paid attention to a stronger labor market and economy and changed the GDP forecast – this is precisely the reason for the tightening of the Fed rate forecast: the central tendency became 0.2–0. 3% higher in 2024–2026. The upcoming inflation statistics also leave much to be desired: for example, sticky prices (prices for goods not subject to market fluctuations) increased by 4.4% over the year (an increase of 0.33% in February, 0.53% in January), which does not imply a return of inflation to the norm of 2% (less than 0.2% per month). In such conditions, government debt yields will rise again, and the start of rate cuts will shift into the future, the expert notes. Leading analyst at Freedom Finance Global Natalya Milchakova also notes that the Fed is not giving a hint of an imminent reduction in interest rates – rather, on the contrary, it is a warning that without a steady movement of inflation to 2% per year, the transition to a loose monetary policy would be premature. This year we can expect two or three rate cuts in the second half of the year, the analyst believes.

Tatiana Edovina