FOMC Review: Confidence Unchanged
Summary
Despite May’s lower CPI, the Federal Reserve (Fed)’s guidance was roughly unchanged. Cuts remain the base case scenario but only after the Fed has gained more confidence on disinflation.
The dot plot showed only one 2024 cut, aligning with my expectations.
Market Implications
I still expect no cut in 2024 against the market pricing 1.7 cuts by December.
May CPI Has Not Materially Increased Fed Confidence
In line with expectations, the Fed remained on hold. In line with my expectations, Fed Chair Jerome Powell did not see yesterday’s CPI as a game changer. He clarified that FOMC members had a chance to change their economic projections after yesterday’s lower-than-expected CPI. He further explained, ‘We’re looking for something that gives us confidence that inflation is moving sustainably down to 2% and readings like today’s, that’s a step in the right direction, but, you know, one reading is just only one reading. You don’t want to be too motivated by any single data point.’
Only One 2024 Cut In the SEP
The meeting conveyed strong confidence in growth, no progress on disinflation, a higher long-term dot, and a median 2024 dot showing only one cut, which aligns with my expectations.
The Summary of Economic Projections (SEP) saw 2024 growth at 2.1%, unchanged from March’s SEP. Powell’s introductory statement conveyed strong confidence in growth. He noted a rotation of growth from consumption to investments in equipment and intangibles. During the presser he added, ‘We continue to see still strong growth, solid growth this year.’
The SEP moved disinflation and rate cuts in the future. It showed the Fed expected no progress on core Personal Consumption Expenditure (PCE) this year, with the end-2024 forecast at 2.8% (the same level as the latest print) and 20bp higher than the end-2024 forecast in March’s SEP. This was offset by faster 2025 disinflation than in the March SEP. Core PCE 2026 projections were unchanged from the March SEP.
Asked why he was expecting inflation to slow despite growth above trend and unemployment below its long-term value, Powell mentioned further supply gains.
In line with the more limited inflation progress, the Federal Funds Rate (FFR) trajectory was higher in 2024 and 2025 than in March’s SEP but unchanged in 2026. While the median long-term dot was raised to 2.8% from 2.6% in March’s SEP, Powell explained it had limited consequences for short-term policy making.
Asked why the Fed was forecasting a cut in 2024 despite no inflation progress, Powell answered this reflected a deliberately conservative forecast and base effects. He further indicated his confidence policy was restrictive which would eventually translate into weaker growth and slower inflation.
Fed to Take Holistic Cutting Approach
As usual, Powell refused to provide specifics on what could get the Fed to cut. He stressed the Fed was looking holistically at inflation prints rather than at sub-indices such as housing. The statement also included the usual sentence, ‘We will continue to make our decisions meeting by meeting, based on the totality of the data and its implications for the outlook and the balance of risks.’
Market Consequences
I still expect no cut in 2024 against markets pricing 1.7 cuts by December.
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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
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