Takeaways from a dovish March FOMC decision

Even though the Fed left its policy rate unchanged at between 5.25 - 5.50%,¹ the March FOMC dot plot, updated economic projections and press conference could be interpreted as quite dovish.

Not only did the Fed upwardly revise its median projections for GDP growth for 2024 and with it, core PCE inflation and an improvement in the unemployment rate, but the Fed’s median forecast for interest rates continue to show 75bps worth of cuts by the end of this year. ¹

There had been whispers that the March dot plot would show only two expected rate cuts for 2024. 

Key messages from Chair Powell

Taken together, it suggests a more patient Fed. This was reiterated in the press conference.

Chair Powell recognized it would take time to get to the Fed's inflation target and he said he wouldn't overreact to recent inflation data that was higher than expected.

Powell also said that the labor market wouldn’t have to weaken in order for rate cuts to begin – a message he has shared multiple times in the past several months.

It is worth noting that expectations for rate cuts in 2025 and 2026 were lowered, which caused a steepening of the yield curve.

Having said that, I put very little stock in the Fed’s projections, especially that far out.

When asked about longer run expectations for rates, Powell said we don’t know if rates are going to be higher in the long run.

He suspects rates won’t be ultra-low in the long run but admitted that there is tremendous uncertainty around that.

Powell also said the Fed is getting close to slowing the pace of quantitative tightening. This is good news as it is part of the normalization process for the Fed.

Investment Implications

Not surprisingly, markets reacted positively to today’s developments.

Prior to the meeting, Fed funds futures were pricing in slightly fewer than three rate cuts for this year and as of today, are pricing in more than three.

This doesn't change my expectations around Fed policy. I anticipate we will see the first rate cut before the end of the second quarter driven by disinflationary forces and a looser labor market.

The Fed’s statement acknowledged that inflation “has eased over the past year” and their latest projections show core PCE inflation falling close to 2.5% at the end of this year driven by below-trend growth. ¹  

APAC markets and central banks have been waiting with bated breath on when the first Fed rate cut will occur and what the monetary policy path forward will look like for the rest of the year.

I believe that the March FOMC meeting and dot plot shows greater clarity, as three rate cuts projected for this year remain on the table for the Fed.

Risk assets such as stocks and EM are likely to benefit from loosening monetary policy in the US as investors shift to riskier assets.

I continue to favour EM equities, particularly EM Asian equities and EM local currency credit, and other assets that benefit from lower yields, such as gold and bitcoin.

With contribution from Kristina Hooper