Fed raises GDP and inflation outlook, while keeping rate cut forecast

Federal Reserve members still see three interest rate cuts in 2024 despite an improving outlook for economic growth.

The Federal Open Market Committee’s March projections for rate cuts, or the so-called “dot plot,” shows a median Federal funds rate of 4.6% in 2024. With the current fed funds rate in a range of 5.25% to 5.50%, the dot plot implies three cuts of a 0.25 percentage point each.

The previous Summary of Economic Projections (SEP) from December also showed three rate cuts in 2024.

However, the projected change in real GDP for 2024 was 2.1% in the March projection, up from 1.4% in December. Core PCE inflation projections also ticked up, to 2.6% from 2.4%.

The updated projections came after inflation reports for January and February dampened hopes that the Fed has price increases under control. Traders had already been dialing back rate cut projections for this year ahead of Wednesday’s update from the central bank.

“The FOMC’s SEP continues to show [0.75%] of rate cuts this year, even as the core-PCE estimate was increased by 0.2 pp to 2.6%,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “We’ll argue this is the most relevant takeaway from the SEP because it suggests the upside seen in realized inflation early this year is being dismissed by monetary policymakers.”

Fed Chair Jerome Powell said in his news conference Wednesday that the central bank wasn’t completely dismissing the recent inflation reports, though he did say that the January data may have been distorted by seasonal factors.

“I take the two of them together, and I think they haven’t really changed the overall story, which is that of inflation moving down gradually, on a sometimes bumpy road, toward 2%,” Powell said.

There were some smaller changes within the dot plot. In December, there was a bigger split among individual Fed members, with two FOMC voters indicating zero cuts in 2024 and another seeing six reductions. The most aggressive prediction now, in the March projections, has been dialed back to just four cuts.

Additionally, the median projection for the fed funds rate in 2025 rose to 3.9% from 3.6%, implying one less cut. The long-run projection for that benchmark rate ticked up to 2.6% from 2.5%.