Fed Votes to Hold Rates Again

Today’s action of the Federal Open Markets Committee of the Federal Reserve — namely to hold rates where they have been — was broadly expected. Particularly as at the end of the January meeting, Fed Chair Jerome Powell explicitly said that it would be very unlikely for rate cuts to begin now.

“Inflation has eased substantially while the labor market has remained strong, and that is very good news,” Powell said in today’s press conference following the FOMC March meeting. “But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. We are fully committed to returning inflation to our 2 percent goal. Restoring price stability is essential to achieve a sustainably strong labor market that benefits all.” He continued later in his speech, “The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.

In other words, even now it seems unlikely that there would be any rate cut until the June meeting at the soonest and possibly later. At the same time, there was a recognition of coming change.

“As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals are coming into better balance,” Powell said. “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

“Recent economic indicators, including the two significant measures of inflation, CPI and PPI, remain elevated, making it evident that the Fed’s fight against inflation is still far from over and casting a shadow on any potential rate cuts within the year,” Greg Friedman, managing principal and chief executive officer of Peachtree Group, said to GlobeSt.com in emailed prepared remarks. “The reality is that the 10-year Treasury is more likely to average closer to 4%, as opposed to the 2% it averaged over the previous 12 years. The persistence of elevated interest rates spells increasing headwinds for the commercial real estate sector, which faces the daunting task of managing nearly $1.0 trillion in debt maturities this year alone. Smaller and regional banks with significant stakes in commercial real estate are especially vulnerable. Should these interest rate headwinds lead to further property value declines and additional distress, the consequences could have a widespread impact on the overall economy.”

And Charlie Ripley, senior investment strategist for Allianz Investment Management, pointed to a disconnect between Fed and market expectations. “The Fed exercising patience with regards rate cuts earlier this year appears to be the right call given the inflation data and this has allowed the Fed to earn back some credibility in the meantime,” he said in prepared remarks. But, as he pointed out, the Fed’s long-run median expectations imply a federal funds rate of 2.5%. Market pricing sees more like 3.5%.

“While the market was quick to reprice Fed expectations in the near term, we think it’s more likely the Fed has work to do in adjusting their long-term policy rate forecast,” Ripley says. “Therefore, even though we may continue to see noise around the timing of rate cuts in the near term, the longer run policy rate expectations matter more and there is still a clear difference between the market and the Fed in terms of where the terminal rate will land.”