How Fed Commentary Influences Interest Rate Decisions

The Federal Reserve just reinforced what many of us managing corporate balance sheets have suspected: more rate cuts may not be coming particularly soon. At its March meeting, the FOMC held rates steady at 4.25%-4.5%, but the bigger message was in what they didn’t say. They removed language suggesting balanced risks to inflation and employment and introduced a key phrase—“uncertainty around the economic outlook has increased.” In other words, don’t expect a clear policy direction soon. Some key takeaways… • Rate cuts are not a given. While the median projection still calls for two cuts in 2025, more FOMC participants now expect just one—or none at all. • Inflation concerns remain. Powell explicitly linked higher inflation forecasts to tariffs, underscoring how external factors are complicating the Fed’s decision-making. • Balance sheet runoff is slowing. The Fed is reducing its quantitative tightening (QT) pace to prevent liquidity stress in the Treasury market, though mortgage-backed securities will continue rolling off. What This Means for CFOs and Treasurers… For companies with floating-rate debt, this is a reminder to plan for an extended period of borrowing costs at this level. The market may still be pricing in rate cuts, but the Fed is clearly in “wait-and-see” mode. • Liquidity management remains critical. The Fed’s QT slowdown is aimed at avoiding a funding squeeze, but liquidity conditions could still tighten. • Watch trade policy closely. Tariffs are emerging as a wildcard for inflation—and, by extension, monetary policy. Powell said it best: “We are in no hurry.” Neither should we be when it comes to assuming lower rates. The best approach? Stay agile and scenario-plan rigorously. #finance #economy #policy #inflation #federalreserve #business #tariffs

The takeaway from today's #federalreserve decision is that while core inflation has surprised to the upside so far in the first quarter, not much has changed for Chair Powell and many of his colleagues on the FOMC. I think the markets rightly viewed the days events as dovish, hence the rally in stocks and bonds. Looking at the Summary of Economic Projections. The median barely held on at three cuts. Had another person shifted, we would have been at two cuts. Nonetheless, GDP was revised up, core inflation was revised up (higher NGDP) and the median dot was still unchanged. Should inflation surprise to the downside between now and March, we could see the median solidify somewhat. Powell struck a number of important themes at his press conference. First, inflation is about the fundamental path. Thus, he did not get too excited about the downside surprises in H2 2023 and is not too concerned about the upside surprises so far this year. The upside surprise can be seen as a reason not to cut in March, but not a reason to not think about cuts this year. Second, Powell had a chance to push back against the easing of financial conditions we've seen so far this year. He did not take the bait. Talk about revealed preferences. Third, strong growth won't necessarily push the Fed away from cutting rates. This is perhaps a sign that Powell sees a stronger supply-side backdrop. At any rate, tolerating stronger growth is dovish, all else equal. The risk for the Fed is that January and February's inflation data represent a series of higher than expected inflation prints. I get the risk, but ultimately, Powell sees the stance of monetary policy as very restrictive. As a result, he's more on alert for downside surprises to growth than he is upside surprises to inflation.

After reading a lot of “hot takes” on inflation, I realized a few things are worth underscoring. A Top 10 List 1) The Federal Reserve made no commitment to cut rates at the March meeting; Chair Powell underscored that every meeting is live - the Fed thinks they are at a peak in rates but could change their mind. 2)The Fed revised up its forecast for growth (a lot) inflation (a bit), revised down its forecast for unemployment (a bit.) To reflect those shifts, it the pace at which it expects to cut rates in the medium term. (2024-2026) 3) The median forecast is for three cuts in 2024 BUT the number of people expecting to cut two or less rose; rate cuts in subsequent years are less. The neutral (non inflationary) rate also moved up (a bit.) 4) The Fed is managing risks. It is balancing the risk of cutting rates prematurely against holding rates too high for too long and causing an unnecessary recession. The Fed would rather quell inflation by slowing the pace of cuts than raising unemployment rapidly. 5) Powell said every meeting is live. Nothing is set in stone in terms of the course of policy, let alone direction, until we get closer to what looks like price stability. Lags in policy suggest the Fed moved when it approached but has not yet reached its goal. 6) The Fed would not hesitate to hike again if inflation gets stickier. 7) Powell reminded us that the Fed could and has moved between meetings; it would not hesitate to change policy in a crisis. 8) An acceleration in employment (or growth) alone is not enough to make the Fed resume rate hikes; it could be accompanied by a rise in productivity, which would alleviate the upward pressure on prices. 9) The Fed is not the enemy of wage gains but is concerned that wages may be rising faster than needed to achieve price stability - wages are growing faster than inflation, which is restoring purchasing power. Productivity is the elixir that enables us to keep more of what we earn without stoking inflation. 10) We could be close but are not yet at an inflection point in policy. This is when monetary policy is more nuanced and more of a art than a science. It is also when consensus tends to break down and more dissenting votes express their concerns - Powell made a point of welcoming the debate as it is healthy - within the Fed it is usually, although not always been respectful. Bottom Line: Normalizing rates after a bout of inflation is not the same as cutting to stimulate a moribund economy. More broadly, central banks are concerned that global fragmentation, climate change, armed conflicts and geopolitical risks have left us more susceptible to supply shocks and bouts of inflation. That could require more activists monetary policy to dampen inflation and raise the risk of more volatile business cycles. We’re not in Kansas anymore.