BY: Matthew Kimbrough
Portfolio Manager
Today’s Decision
The first FOMC meeting of 2024 came and went in a much less dramatic fashion than the last FOMC meeting of 2023. In a unanimous decision, the Fed Funds Rate was held steady at the range of 5.25 – 5.50%.
The last 25bp rate hike took place in July of 2023. Looking back at the previous five interest rate cycles, on average, the Fed Funds rate has remained at its peak for eight consecutive months before policy begins to turn more accommodating.
The Statement
There were several amendments to the official Fed statement in this month’s release.
- “Economic activity has been expanding at a solid pace.”
- References to the U.S. banking system being sound and resilient were removed altogether, perhaps due to turmoil announced at another banking institution (NY Community Bancorp) earlier this morning.
- The following sentences were added, “The Committee judges that the risk to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”
- Additionally, and most importantly, the bias towards “additional policy firming” was removed. Language acknowledging the potential for less restrictive monetary policy was added. However, this language appears to be carefully articulated in order to actually reduce the likelihood of rate cuts this upcoming March. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 percent.”
- No adjustments were made to the Fed’s Balance Sheet Policy.
The Press Conference
“We believe the policy rate is likely at its peak for the current cycle.”
We have six months of good inflation data, but we want more good data (before we have “greater confidence” that inflation is moving sustainably towards 2%).
When asked about the potential for rate cuts in March, Powell stated, “Based on the meeting today, I don’t think it’s likely that the Committee will reach a level of confidence by the March meeting to do that.”
“Balance sheet runoff so far has gone very well… At this meeting we did have some discussion of the balance sheet, and we’re planning to begin in-depth discussions of balance sheet issues at our next meeting in March.”
The Market Reaction
Treasury yields were already down on the day but fell less after the FOMC statement was released and Fed Chair Powell gave his press conference. The 2-year US Treasury Note is currently yielding around 4.27%, and the 10-year Treasury yield sits at 3.99%.
Notably, this morning, the CME’s FedWatch tool (which is based upon Fed Funds futures markets) displayed around a 55% likelihood of a rate cut in March, but after the press conference, the odds of a March rate cut had fallen to around 37%.
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