4 Key Takeaways From the Fed Meeting

investing.com:

Four fairly quick observations on this Federal Reserve meeting day, not all of which have anything to do with the Fed:

The FOMC today announced unchanged policy for now on the overnight interest rate, on the pace of QT runoff, and on the collective expectation of the Committee for the number of rate-cuts in 2024 (three, 25bp cuts). But it beats noting that while three cuts is the median expectation, the mean expectation dropped substantially.

Only one official sees four rate cuts in 2024, compared to five who saw that many or more, as of the December survey. Those four folks moved to ‘three’, and one of the ‘three’ folks moved to ‘just one.’ Nine of the nineteen dots are for fewer than three cuts this year, so we should say this is a closer call than the market seems to think.

The longer dot plots also show some increase in Committee members’ expectations for the neutral short-term interest rate (the so-called ‘r-star’ originally popularized, I think, by Greenspan). The significance of this for investors and traders is that the overnight rate is unlikely to go back to zero unless we get another enormous calamity; the significance for the economy is essentially nil since it is money, and not interest rates, that matter.

I’ve written before about why there are good reasons to think of something like 2-2.25% as the neutral long-run real rate, and so if CPI inflation is expected to be 2.25%-2.5% then something around 4.5% is neutral long-run nominal rate. We are mighty close to that now, so there is no compelling reason to think that interest rates should decline markedly from here.

At the short end of the curve, we should eventually be lower – but we need to also keep in mind the growing imbalance in the supply and demand