Fed dots still show three 25bp rate cuts likely this year

The Federal Reserve kept the benchmark fed funds rate unchanged at 5.25% - 5.50% as expected. The statement indicated that the Fed wants “greater confidence that inflation is moving sustainably toward 2%” before cutting rates. While recognizing that inflation has slowed, the FOMC noted that it is still elevated, and was “strongly committed” to getting inflation back to the 2% target. In the post meeting press conference, Chairman Powell said that the policy rate was “likely at its peak” and that cuts would be appropriate “at some point this year”. However, he reiterated that the Fed would be willing to maintain rates higher for longer if the data warranted it. On balance sheet reduction, he noted that the Fed will maintain the current pace of reduction in the balance sheet, but that they did discuss slowing the pace of QT “fairly soon”.

The summary of economic projections showed a sharp upward revision to this year’s GDP growth forecast to 2.1% from 1.4% previously, a modest upward revision to core PCE inflation to 2.6% from 2.4% in December, and a slight decrease in the forecast unemployment rate to 4.0% from 4.1% in December. Nevertheless, the dot plot showed 75bp in rate cuts remains the median scenario this year. The forecast for the fed funds rate in 2025 is higher however, implying another three 25bp cuts next year, compared with four in the December dot plot. The long run fed funds rate projection increased to 2.6% from 2.5% previously, suggesting that policy makers see the “neutral” interest rate for the economy is higher than previously thought. However, Powell stressed that there was a high degree of uncertainty around the neutral rate in the longer term.

UK inflation slowed by more than expected to 3.4% y/y in February from 4.0% in January, although this was largely due to a high annual base. On a monthly basis, headline inflation rose 0.6%. Core inflation (excluding food, energy, alcohol and tobacco) fell to 4.5% y/y from 5.1% in January, in line with market forecasts. However, services inflation is still elevated at 6.1% y/y. The Bank of England is expected to keep rates on hold at their meeting today.

Japan’s composite PMI rose to 52.3 in the March preliminary reading from 50.6 in February. Manufacturing remained in contraction territory at 48.2 but improved from last month, while services activity picked up with the services PMI at 54.9 from 52.9 in February. This was the highest services PMI reading since May 2023.

Today’s Economic Data and Events

13:00 Eurozone composite PMI (Mar, prelim) forecast 49.7

13:30 UK composite PMI (Mar, prelim) forecast 53.1

16:00 Bank of England MPC rate decision, forecast 5.25%

16:30 US initial jobless claims (Mar 16) forecast 213k

17:45 US composite PMI (Mar, prelim) forecast 52.2

18:00 US existing home sales (Feb) forecast 3.94mn

Fixed Income

• Treasuries rallied on Wednesday after the Fed’s new dot plot showed 75bp in rate cuts as the median forecast for this year, unchanged from December despite higher growth and core PCE forecasts. 2y treasury yields fell -8bp to 4.60%, while 10y yields declined -2bp to 4.27%.
• Benchmark 10y yields fell across most developed markets yesterday with Italy and Australia being the notable exceptions. Italy’s 10 yield rose 0.8bp to 3.71% while Australia’s 10y rose 2.1bp to 4.1%. UK gilt yields fell -4.6bp to 4.01%.

FX

• The USD index fell -0.4% against a basket of major currencies yesterday, after four days of gains. GBP and AUD firmed against the dollar, but the yen weakened further to 151.67/USD. EUR was broadly unchanged.

Equities

• US equities predictably rallied after the FOMC meeting as policy makers signalled that recent higher than expected inflation would not derail the three 25bp rate cuts the market had been pricing. The Nasdaq100 rose 1.2%, followed by the DJIA at 1.0% and the S&P500 at 0.9%. European equities were mixed on Wednesday with the FTSE100 (-0.2%) and CAC40 (-0.5%) closing lower and the DAX index closing 0.2% higher.
• Regional equity markets were also mixed with the DFM and ADX indices rising 0.4% and 0.1% respectively while Tadawul ASI fell -0.5%.
• Borse Dubai is selling one-third of its stake in Nasdaq to “enhance the capital structure and liquidity within the group”. The sale will raise USD 1.6bn for Borse Dubai, which will still hold more than 10% of Nasdaq stock.

Commodities

• Brent and WTI declined -1.6% and -2.1% respectively on Wednesday despite EIA inventory data showing a 1.95mn barrel decline in crude inventories last week. Gasoline inventories also declined to the lowest level since December, as demand increased again last week. Oil prices are trading higher in Asia this morning after a relatively dovish Fed boosted risk appetite.