The Federal Reserve recently concluded its March meeting, keeping interest rates unchanged. The “dot-plot,” a representation of FOMC members’ expectations for rates over the next two years, stayed at three rate cuts for 2024. The median rate projected for 2024 is 4.625%, a 75-basis point difference from the current rate of 5.375%. However, there are concerns that the number of rate cuts could be reduced to two if two participants change their end-of-year rate projection to 4.875%.
The FOMC’s outlook for 2025 and beyond also shows a more hawkish stance, with fewer expected rate cuts compared to December. Despite higher inflation readings in January and February, Chairman Powell remains optimistic about the economy, suggesting that the recent inflation spikes are temporary. The FOMC has also revised its GDP forecast for 2024 to 2.1%, indicating a more positive view of the economy. Powell’s comments at the press conference were less hawkish than anticipated, leading to a surge in equity markets to record highs.
One notable change post-meeting is the Fed’s continuation of reducing its securities holdings, contributing to a contraction in the money supply. This move aligns with the Fed’s tightening policy and is in line with efforts to combat inflation. Prolonged money supply contractions have historically been associated with economic recessions, raising concerns about the potential impact of the Fed’s actions on the economy.
In financial markets, the DJIA and S&P500 hit record highs but reversed on Friday, while the Nasdaq continued its upward trajectory driven by AI enthusiasm. Existing home sales rose by 9.5% in February, but inventory shortages and higher mortgage rates are challenging the housing market. The lack of inventory and higher interest rates are discouraging existing homeowners from selling, leading to below-average sales figures compared to the Great Recession.
The banking system faces challenges, with concerns about Commercial Real Estate (CRE) prices and potential impacts on regional and small banks. A previous mini-regional bank meltdown in March 2023 highlighted vulnerabilities in the banking system, with losses in the “Held to Maturity” bond portfolios leading to capital erosion. The Fed’s decision to close a loan facility aimed at supporting banks in such situations raises questions about the sector’s stability and potential fallout from declining CRE values.
Overall, the economy presents mixed signals, with positive economic indicators like Non-Farm Payrolls and negative trends in the job market. Concerns about CRE values, the impact of remote work trends on office space, and potential banking system challenges suggest a need for caution. The Fed’s commitment to a “higher for longer” policy based on a strong economy may face headwinds from emerging weaknesses like declining manufacturing and job creation trends. As uncertainties persist, the Fed may need to consider adjusting its approach to rate cuts to navigate potential risks in the economic landscape.
