UBS:
The Federal Reserve doesn't have the data in hand to be confident inflation will decline to and then sustain its 2% target. Chairman Jerome Powell explained during his press conference that while the stronger January and February inflation prints appeared to be just bumps in the road, the Fed couldn't take that for granted.
If there was a surprise in the March FOMCr then it was the decision to leave the estimates of long-run GDP and interest rates unchanged. The Fed remains adamant that trend growth remains 1.8% and that the long-run nominal rate is 2.5%. That means the FOMC is expecting to have to cut rates and then having to use each press conference and communication as an opportunity to explain why it hasn't.
MUFG:
The US Fed kept its policy rate unchanged at 5.25%-5.50% in March and signaled that it remains on track to cut rates “at some point this year”. The dot plot continues to show the Fed cutting rates 3 times, though the median dot plot for 2025 has drifted to 3 cuts, compared to 4 cuts in December 2023. The recent hotter-than-expected inflation data have not changed Fed’s expectations for rate cuts this year.
The Fed thinks it will be a bumpy road to bring inflation down. They have also reiterated it will only lower interest rates when policymakers are more confident about inflation moving sustainably back to 2%.
When asked whether continued strength in jobs market would lead the Fed to push back on whether to deliver on rate cuts, Powell said that strong job growth alone is not a reason to be worried about inflation coming back; thus, they would still cut rates (i.e. as part of normalizing policy). This is consistent with our view – we do not believe that the labor market needs to collapse for cuts, but if the jobs market cools in 2H-2024 as we expect, they can cut
TD Securities:
We were all looking to see how the Fed's outlook for rate cuts would shift in the wake of the recent uptick in inflation and subsequent hawkish rhetoric from various FOMC members. While the median Fed dot is still calling for 75 basis point in cuts for 2024, the range of estimates moved higher. Importantly, the Fed is expecting a slower path of rate cuts in 2025 and the long-term neutral rate estimate nudged higher. This decision may not be as hawkish as some might have expected, but it is consistent with the upgrade to economic growth and the expectation that inflation is more likely to remain elevated over the coming year.
Today's report does little to change the expectation for the start of rate cuts. Rather it focuses on the speed of rate cuts. We have been arguing for some time that the strength of the American economy has granted the Fed optionality to be patient as inflation moves towards the 2% target. This is important because the path of inflation will not be a straight line. Recent CPI/PCE readings have made this blatantly clear. Over the last few months, these hotter inflation readings caused market pricing to push the timing of the first rate cut from today(!) all the way to the June/July time period. While we agree with this timing, it will require the economy to show some signs of slowing and for inflation to re-establish is downward march to 2%.
ING:
Initial reaction was muted with market pricing for the June FOMC meeting remaining at 18bp of cuts, as it was just before the announcement, but comments on inflation potentially being impacted by seasonality issues and strong labour data not being a barrier to rate cuts means we are now up at 21bp priced for June. Meanwhile, the reaffirmation of three rate cuts this year means we are now at 82bp of cuts priced for the year versus 74bp just before the announcements (remember we had nearly 175bp priced in early January). The next key macro report will be the core PCE deflator on 29 March (Good Friday so market conditions will be thin), but that will likely be 0.3% month-on-month, so still too hot for the Fed. As such, the risk is that yields stay flat to slightly higher until the jobs report in early April where we will be looking to see if the weakness in all the employment components of business surveys (NFIB, ISMs, Homebase, ADP and weakening quits rates) finally starts to show up in the official data.
They are suggesting the neutral Fed funds rate is around 2.6% so there is room for up to 300bp of cuts just to move to “neutral”. We think they won’t want to go quite that far given the prospect of ongoing loose fiscal policy irrespective of who wins the November presidential election, but we expect 125bp of cuts this year, starting in June, with a further 100bp in 2025 as hopes rise for a soft landing for the economy
Rabobank:
Powell interpreted the recent overshoot in inflation data as “bumps in the road.”
He stressed that an unexpected weakening of the labor market could also be a reason to cut.
We still expect three rate cuts in 2024, starting in June. Assuming a Trump victory in
November, leading to a rebound in inflation caused by a universal import tariff, we expect the Fed to pause its cutting cycle after two rate cuts in 2025. Meanwhile, we should expect tapering of quantitative tightening “fairly soon.” In our view this could mean as soon as the next meeting in May.
Commerzbank:
The lack of momentum of U.S. Treasurys and German Bunds at the yield highs suggests that markets stay reluctant to renew rate-cut euphoria in the absence of notable downside surprises in inflation data.
Markets got their first impulse this morning form U.K inflation data, where a sizable decline was expected, while today's European Central Bank Watchers Conference or FOMC meeting seem unlikely to revive the momentum
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