Asset Managers React to the Fed’s Decision to Maintain Interest Rates

Finally, the Federal Reserve (FED) meeting has not brought surprises, and the body, led by Jerome Powell, decided to keep interest rates unchanged. Furthermore, the FOMC members target three rate cuts throughout 2024, being the most likely scenario a cut in June.

But what does this move mean, and what are the prospects for the year? Here are the opinions of fund management companies:

James McCann, Chief Economist at abrdn

The Federal Reserve is not alarmed by the uptick in inflation earlier this year. In fact, FOMC members continue to target three rate cuts throughout 2024, unchanged from their late 2023 forecasts, implying that the recent price growth observed in the last few months will largely be a slowdown in the final stretch of their fight against inflation.

However, the press release made it clear that the central bank requires more confidence that inflation is sustainably heading back to its 2% target.

It's likely that markets will breathe a sigh of relief seeing that the recent upward surprises in inflation haven't triggered a more aggressive stance from the Federal Reserve, as the central bank is clearly comfortable waiting to see how inflation data evolves, especially with some tentative signs of slowing growth starting to emerge. The most likely scenario remains a cut in June, should inflation cool somewhat in the coming months, and we see further indications that activity is losing momentum in the context of tight monetary policy.

Tiffany Wilding, Managing Director & Economist at PIMCO

What Happened?

The U.S. Federal Open Market Committee Meeting (FOMC) chose to maintain its interest rate at its 5.25 – 5.5% level. The statement and projections were broadly in line with expectations; while the 2024 rate forecasts, a near-term road map of what the Fed is considering regarding future interest-rate moves, was unchanged, showing 75 basis points (bps) of cuts (in line with expectations, but less hawkish than feared). Economic projections changes were also minimal with the exception of a greater than expected upward revision to 2024 growth. Notably core PCE (Personal Consumption Expenditures, the Fed’s preferred inflation measure)  was also revised higher. 

What Does It Mean?

Overall, we think updated projections show a Fed all but committed to starting the process of normalizing rates in the coming months, while at the same time grappling with broader questions about inflation and the interest rate sensitivity of the US economy, which will dictate the pace of cuts over the next year or two. With Fed officials still projecting that core PCE will remain in the “two point something” range, we continue to expect a baseline of 75 bps of cuts in 2024 starting in June, but view the near term risks as skewed toward fewer cuts being delivered than what is currently forecasted by Fed officials. 

What Is Next?

Federal ReserveChair Jerome Powell confirmed that “fairly soon” the Fed will “taper and extend” its balance sheet, which we expect will occur with the gradual reduction of Treasury runoff caps. We now expect the Fed may make this announcement as early as the May FOMC meeting, ahead of our previous expectation of a June announcement. Powell also signaled a high bar for rate hikes, downplaying inflation – calling the recent inflationary reacceleration “bumps” – and pointing to labor market resilience.

Susan Hill, Senior Portfolio Manager & Head of Government Liquidity Group at Federated Hermes

This week’s FOMC meeting was largely a non-event overall, but with a few interesting details. The Federal Reserve kept the fed funds target range unchanged at 5.25-5.5%, which Chair Jerome Powell acknowledged as likely the peak rate for this cycle and the FOMC statement had few changes. In his press conference, Powell emphasized they believe inflation is on a sustainable, though bumpy, path back to 2%, and they need additional confidence from the data before moving to a less restrictive policy. Powell’s communications were balanced, consistent with our outlook for easing by the Federal Reserve starting in the June/July time frame.

The “interesting” bits came in the minutiae that are the infamous dots. At 4.6%, the median dot remained the same as it had in December. That said, it was a close call. Just two participants needed to shift their views to move it, but just one did. However, the projections for 2025 and 2026 rose incrementally (from 3.6% and 2.9% to 3.9% and 3.1%, respectively). And somewhat surprisingly the long-run dot did as well, from 2.5% to 2.6%—the first time this projection changed since early 2019. The Federal Reserve may be acknowledging that the neutral fed funds rate, at which monetary policy is neither restrictive nor accommodative, is a little higher than previously thought. Definitely something to keep an eye on.

Whitney Watson, Co-Head and Co-CIO of Fixed Income and Liquidity Solutions for Goldman Sachs Asset Management

Despite projections of stronger growth, lower unemployment, and slightly higher core PCE inflation, policymakers still anticipate three rate cuts this year. We continue to expect that inflation progress over the past year and disinflationary signals, such as rebalancing in labor, goods, and rental markets, will lead the Fed to begin its cutting cycle this summer. The slight rise in the longer-run policy rate forecast is both negligible and noteworthy. It is negligible because market expectations are already much higher, but noteworthy as it reinforces the market's recent perception that the rate-cutting cycle may be shallower than initially anticipated. Overall, despite recent bumps in the inflation road, major central banks remain on track for rate cuts in the coming months and high-quality fixed income bonds stand to benefit.