U.S. Federal Reserve holds interest rates steady, projects 0.75% worth of cuts in 2024

Richard Schmidt

March 20, 2024

Key messages

The target range for the federal funds is still 5.25-to-5.5%
Inflation continues to ease but remains a concern
The U.S. Federal Reserve projects it will cut interest rates by 0.75% in 2024, 2025 and 2026

The message coming out of the U.S. Federal Reserve’s (Fed) March 2024 meeting is mostly the same as its message that kicked off the year – that it would hold its target range for the federal funds rate at 5.25-to-5.5% and that it would continue to reduce its holdings of Treasuries, agency debt and agency mortgage-backed securities.

Furthermore, the Fed reiterated that “the [Federal Open Market] Committee (FOMC) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Expectations for U.S. economic growth pushed higher

Taken from the Fed’s latest statement, “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

In the Fed’s updated summary of economic projections, it now expects economic growth of 2.1% in 2024 (up from 1.4% in its December projections), 2.0% in 2025 (up from 1.8%), 2.0% in 2026 (up from 1.9%) and 1.8% longer term.

The Fed and markets continue to expect three 0.25% rate cuts this year

While the Fed judges that the risks to achieving its maximum employment and 2% inflation goals are moving into better balance, it continues to cede that “the economic outlook is uncertain,” and that it “remains highly attentive to inflation risks.”

Estimates for core inflation in 2024 was increased to 2.6% from 2.4% in the Fed’s December projections, illustrating how inflation remains a key concern. Core inflation estimates for 2025 and 2026 remain unchanged at 2.2% and 2.0%, respectively.

The Fed’s median interest rate estimates are now 4.6% in 2024 (no change from its December projections), 3.9% in 2025 (up from 3.6%) and 3.1% in 2026 (up from 2.9%). This would suggest the Fed is looking to gradually reduce rates over the next three years – we should see three cuts totaling 0.75% this year, for 2025 and for 2026. Interestingly, the Fed dialed back its expected rate cuts in 2025, likely to adjust for its revised expectations for shorter-term inflation.

Overall, we still expect the Fed to begin easing monetary policy by cutting interest rates in the second half of the year.

Scotia Global Asset Management’s Multi-Asset Management Team remains cautious at this time

As we wait to see when and by how much the Fed will cut rates, we continue to exercise caution. The cumulative impact of higher rates is still very much playing out and our bear market indicators continue to flag an increased risk of recession.

In our portfolios that include a tactical asset allocation overlay, we remain underweight equities relative to fixed income overall. Following the decline in bond yields at the end of 2023, given the expectation for lower rates in the near future, we reduced interest rate risk and positioned portfolios for a steeper yield curve (where the difference in yields between short- and long-term bonds is greater).

You can read more about our short- and long-term outlooks and how we position portfolios here.

For more information about this announcement or your portfolio, please contact your MD Advisor*.

The next FOMC rate announcement is scheduled for May 1^st.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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