Energy News Beat
Dot plot shifts hawkish: 8 of 19 want see either no cut or just 1 cut in 2025.
By Wolf Richter for WOLF STREET.
The FOMC voted today to keep the Fed’s five policy rates unchanged, for the second meeting in a row, after cutting by 100 basis points in 2024. All participants agreed with the rate decision. But Christopher Waller dissented because he preferred to continue the current pace of QT.
- Target range for the federal funds rate at 4.25-4.50%.
- Interest it pays the banks on reserves at 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs) at 4.25%
- Interest it charges on overnight Repos at 4.50%.
- Interest it charges banks to borrow at the “Discount Window” at 4.50%.
And participants still see only two cuts in 2025 in the “dot plot,” projecting higher inflation and lower unemployment in 2025.
The FOMC will slow as it has outlined in a series of communications, including in the minutes of the last meeting, and via a speech by Roberto Perli, manager of the System Open Market Account (SOMA) at the New York Fed, which we discussed here, including charts of the issues involved. Today, the FOMC provided specifics:
- It will slow the Treasury securities run-off to $5 billion a month starting April 1, from currently $25 billion a month.
- It will let MBS continue to run off. The MBS runoff, which is not capped, has been around $15 billion a month.
The Fed now sees a risk that the massive liquidity flows around debt-ceiling dynamics, which affect the liabilities on its balance sheet, will mess up the indicators it uses to determine if QT has sufficiently reduced the reserve balances on its balance sheet to be near “ample.” The Fed has already shed $2.2 trillion in assets since it started QT in July 2022.
The issue revolves around the government’s $800-billion checking account at the Fed, the Treasury General Account. During the debt-ceiling phase, the government will not be able to raise new cash and will draw down the TGA to near zero, which pushes close to $800 billion in liquidity into the money markets, and thereby some of it into the reserves that banks put on deposit at the Fed, thereby inflating those reserves. After the debt ceiling is resolved, the government will raise cash by selling hundreds of billions of T-bills to refill the TGA within a very short time, which very quickly sucks this liquidity back out of the money markets, and thereby out of the reserves. These huge and sudden liquidity flows into and then out of its reserve balances essentially blind the indicators the Fed uses to determine the proper level of reserves.
The “dot plot.”
Today’s meeting was one of the four per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plot.” The prior SEP came out at the December meeting.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric. These projections are neither a decision nor a commitment. Members change their projections as the economic situation changes.
Interest rates: still only 2 cuts in 2025. The midpoint of the target range for the federal funds rate is currently 4.375%.
Today’s median projection for the end of 2025 remained at 3.875%, same as in December, so only 2 cuts of 25 basis points each in 2025, reflecting the Fed’s continued “patience,” as the Fed governors are now calling this wait-and-see period.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
4 see 4.375%: No cuts
4 see 4.125%: 1 cut of 25 basis points
9 see 3.875%: 2 cuts of 25 basis points
2 see 3.625%: 3 cuts of 25 basis points.
GDP growth: The median projection for real GDP growth for 2025 declined to 1.7%, from 2.1% at the December SEP. And 2026 growth was reduced to 1.8% (2% is the 15-year average real GDP growth of the US).
Unemployment rate: The median projection for the unemployment rate at the end of 2025 rose to 4.4% (from 4.3% at the December SEP).
Inflation rate, median projections continue to rise:
- For “core PCE” inflation by the end of 2025 jumped to 2.8% (from 2.5% at the December SEP). The actual core PCE price index for January was 2.6%.
- Headline PCE inflation by the end of 2025 rose to 2.7%, from 2.5% in the December SEP, and higher than it is now (2.5% in January).
- Still no 0% in sight until 2027.
The “longer-run” federal funds rate: The median projection for the “longer-run” federal funds rate beyond 2027 remained at 3.0%, same as in December, and up from 2.9% in September, 2.8% in June, and 2.6% in March last year.
At the same time, it sees PCE inflation at 2.0% beyond 2027. In other words, over the longer term, it sees the midpoint of the federal funds rates to be 1 percentage point higher than PCE inflation.
What changed in the FOMC’s statement:
New: “Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate.”
Old: “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Meaning: XXXXX.
Added language about QT: “Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.”
The whole statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; Alberto G. Musalem; and Jeffrey R. Schmid. Voting against this action was Christopher J. Waller, who supported no change for the federal funds target range but preferred to continue the current pace of decline in securities holdings.
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The post Fed Sticks to Wait-and-See, Sees Only 2 Cuts in 2025, “Dot Plot” Shifts Hawkish amid Rising Inflation & “Uncertainties.” Slows Treasury QT, Maintains MBS QT appeared first on Energy News Beat.
