The Zhitong Finance App learned that on March 26, Cui Can of the Morgan Stanley Fund's fixed income investment department published an article stating that at the Federal Reserve's March 2024 interest rate meeting, all FOMC officials voted unanimously to keep the federal funds rate target range of 5.25%-5.5%, in line with mainstream market expectations. This is the sixth time since the interest rate hike in July 2023 has been suspended. Compared to “balancing risk” in January, the overall tone of the March conference was dovish.
There was not much change in the March statement from January. The only difference is that the judgment on the job market changed from “new jobs continue to slow down” in January to “new jobs remain strong”; economic forecasts continue to be adjusted in an optimistic direction, including raising expectations for inflation and GDP growth, and lowering expectations for the unemployment rate.
The federal funds rate will rise in the next two years, and the 2025/2026 federal funds rate will be raised from 3.6%/2.9% to 3.9%/3.1%; the long-term interest rate forecast will rise slightly by 10 bps, the first since the pandemic; the median forecast for the federal funds rate at the end of 2024 is 4.6% (previous value 4.6%), which corresponds to an interest rate cut of 75BP, which is consistent with the December forecast; the bitmap shows that if the data remains strong, there is a risk of further reduction in the number of interest rate cuts.
Furthermore, Powell stated at the press conference that the January inflation data exceeded expectations due to seasonal factors. Although the absolute value of inflation in February was still high, it was 30BP lower than the core PCE. The January-February inflation data repeatedly did not change the fact that inflation fell back. Just as the Federal Reserve thought it would continue to watch when the inflation data fell in the second half of 2023, he also wouldn't care too much now (but neither would care). He is confident that inflation will continue to approach the target level; in addition, Powell believes that strong employment is mainly due to supply-side factors easing, so there is no reason to worry about inflation. When asked if interest rates will be cut in May, Powell believes that this possibility cannot be ruled out; a market that exceeds expectations may occur between every interest rate meeting. In particular, if the job market weakens, then interest rate cuts would be appropriate, but he hasn't seen it yet.
In terms of downsizing, Powell said the Federal Reserve is discussing details about slowing down the downsizing, but no specific decision has been made. The Federal Reserve will soon slow down the pace of monthly cuts in US debt and MBS, but this does not mean that the Fed's balance sheet will not continue to shrink; it will only reduce liquidity pressure in the money market to a certain extent. Although the Federal Reserve is discussing details about slowing the downsizing, no specific decision has been made.
Cui Can pointed out that overall, Powell believes that short-term inflation data fluctuations will not change the downward trend. Concerns about secondary inflation are low, and he is inclined to respond in advance to prevent risks. After the interest rate meeting, the implied terminal policy interest rate for futures declined slightly by 3 bp to 5.29%, interest rates on two-year US bonds fell by 11 BP, interest rates on ten-year US bonds did not change much, and the overall curve steeper. Although the overall tone is dovish, it is difficult for the market to drastically trade expectations of interest rate cuts supported by data. It is expected that the US will cut interest rates more for preventive purposes this year. Judging from the fundamental comparison, the US dollar still has a comparative advantage, and interest rate cuts may be difficult to drive a sharp decline in the US dollar index.