March FOMC: In the Right Place for Now

Optionality maintained. As expected, the FOMC left the fed funds rate unchanged at 3.50%-3.75% at its March meeting and was careful not to hint at the timing of future adjustments. The statement reaffirmed the FOMC’s view of “solid” growth and inflation that “remains somewhat elevated,” but signaled a little less confidence in the state of the labor market by noting that the unemployment rate “has been little changed” versus previously saying it has shown “some signs of stabilization.”

Increased uncertainty was acknowledged head on in the statement and press conference. There is no doubt in our minds that the spike in oil prices is inflationary over the near term, but this is a supply shock, which monetary policy is ill-equipped to solve. The Fed also has to grapple with the growth-sapping effects of higher oil prices that add a fresh challenge to the already-struggling labor market (Figure 1).

Participants seemed hesitant to incorporate looming stagflation risks into the SEP. The median estimate for PCE inflation at year-end rose to 2.7% from 2.4% in December, less than what we were expecting with our own estimate tracking at 2.9%. The median core projection rose to 2.7%, perhaps reflecting some pass-through of higher energy costs, but more likely, in our view, stemming from the stubborn strength of recent readings that has left the index up 3.1% over the past year (Figure 2). Meantime, the median estimate for GDP this year was revised up a tenth and the median unemployment rate was unchanged. While this did not signal as much of a stagflationary shock as we expected, we note that participants flagged higher uncertainty around their estimates with risks skewed more toward higher inflation and unemployment than in the December SEP.

Read Analysis

Wait-and-see mode kept the median view of rates this year unchanged. The median estimate of the fed funds rate at year-end remained at 3.375%, implying one 25 bps cut in 2026, while the median dot for 2027 held at 3.125% (Figure 3). The continued bias toward easing reflects that most Fed officials still view policy as slightly restrictive, even as the median long-run estimate drifted up a tenth to 3.1%.

The Committee looks a little less divided. No participants viewed a hike as appropriate this year, even as hawkish members have been voicing their concerns about inflation’s prolonged overshoot from target these past five years. At the same time, Governor Waller voted in line with the Committee, making Governor Miran the lone dissenter. Yet even the lowest projection for the fed funds rate at year-end-presumably Governor Miran’s-shifted up, and suggests less dispersion among members’ view at present.

Two more cuts this year remain our base case. We sympathize with the view that the labor market remains on a shaky footing. While the renewed inflation concerns generate risk to our call for the FOMC to cut again by June, we still look for two 25 bps cuts this year and acknowledge they just might end up coming a little later (Figure 4). The inflationary effects of higher oil prices become visible more quickly than does the damage they inflict on growth and the labor market. So long as long-term inflation expectations stay anchored, we believe the Fed could still move the fed funds rate further toward neutral in the second half of the year.

Reserve management purchases (RMPs) continue at their current $40B monthly pace. The Fed did not announce plans to reduce RMPs as we were expecting. Yet given the recent reduction in funding pressures, we suspect a slowdown to around a $20-25B monthly pace has merely been delayed and is likely to be announced at the Fed’s April meeting and begin mid-May.