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Friday, May 24, 2024

The Federal Reserve Predicts rate cuts this year

Key Takeaways:

  • The Federal Reserve has maintained the target range for the federal funds rate at 5.25-5.50% and released its Summary of Economic Projections.
  • The median projection suggests a gradual decline in the federal funds rate from 4.6% in 2024 to 3.1% in 2026.
  • The CME FedWatch Tool predicts a 92% probability that the Fed will maintain the target range for the federal funds rate at 5.25-5.50% at its next meeting. However, over the longer term, the Federal Reserve is expected to cut rates.

On March 20, 2024, the Federal Reserve released its latest Summary of Economic Projections (SEP) and Federal Open Market Committee (FOMC) statement.

The Fed decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2. The decision comes as recent economic data suggests a solid pace of expansion, strong job gains, and a low unemployment rate. 

However, the Fed remains cautious about inflation risks, emphasizing that it will not consider reducing the target range until it is confident that inflation is moving sustainably toward the 2 percent objective.

Summary of Economic Projections

Looking at the SEP, the median projections for GDP growth in 2024, 2025, and 2026 are 2.1%, 2.0%, and 2.0%. These figures are slightly higher than the December projections, indicating a more optimistic outlook. The unemployment rate is projected to remain stable at around 4.0% over the next three years.

Inflation is expected to gradually decline from 2.4% in 2024 to 2.0% by 2026, aligning with the Fed’s long-term target. Core PCE inflation, which excludes volatile food and energy prices, is projected to follow a similar trend, declining from 2.6% in 2024 to 2.0% by 2026.

The SEP also includes a “dot plot” that shows FOMC participants’ individual assessments of the appropriate federal funds rate path. The median projection suggests a gradual decline in the federal funds rate from 4.6% in 2024 to 3.1% in 2026, showing the expectation of a moderating economy and inflation.

Impact on the U.S. Dollar Index (DXY)

The U.S. Dollar Index (DXY) has risen by approximately 2.6% year-to-date (YTD) as of March 20, 2024. The Federal Reserve’s decision to maintain interest rates and its cautious stance on inflation could impact the DXY.

Firstly, the Fed’s decision to keep interest rates unchanged at a relatively high level compared to other major central banks may continue to support the U.S. dollar.

However, the Fed’s projections of a gradual decline in the federal funds rate over the next three years suggest that the U.S. dollar’s yield advantage may diminish over time. As the Fed eventually starts to lower rates, the attractiveness of U.S. dollar-denominated assets may decrease, potentially leading to a weakening of the DXY.

If other central banks, such as the European Central Bank or the Bank of Japan, begin to tighten their monetary policies more aggressively than anticipated, their respective currencies could appreciate against the U.S. dollar, putting downward pressure on the DXY.

CME FedWatch Tool Predicts No Rate Hike at Next Meeting

The CME Group’s FedWatch Tool, which uses futures pricing to gauge market expectations for changes in the federal funds rate, is currently predicting that the Federal Reserve will keep interest rates unchanged at its next meeting. As of March 21, 2024, the tool indicates a 92% probability that the Fed will maintain the target range for the federal funds rate at 5.25-5.50%.

CME Fedwatch Tool

This high probability suggests that market participants largely anticipate the Fed to keep rates steady in the near term, consistent with the central bank’s recent decision to maintain the target range and its cautious approach to adjusting monetary policy. The Fed’s emphasis on assessing incoming data and the evolving economic outlook has likely contributed to the market’s expectation of a pause in rate hikes.

The FedWatch Tool’s prediction aligns with the Fed’s projections outlined in the Summary of Economic Projections (SEP), which indicate a gradual decline in the federal funds rate over the next three years. The median projection suggests a federal funds rate of 4.6% in 2024, 3.9% in 2025, and 3.1% in 2026, implying a measured approach to lowering rates as the economy stabilizes and inflation moves closer to the 2% target.

Lazarus
Lazarushttps://ljlnews.com
Publisher and editor of LJLNews. I am a Stock Market enthusiast, with an interest for politics. I hope you enjoy reading the articles! Contact me at: Lazaruslucas@ljlnews.com

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