Insights from the Latest Fed Meeting

The Federal Open Market Committee (FOMC), which operates under the Federal Reserve System, is responsible for shaping monetary policy within the United States. The committee consists of twelve members, including the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who take turns serving on the committee. This week, the group convened and issued an updated Summary of Economic Projections, along with a press release. Additionally, the chairman conducted a 45-minute press conference. Below, you’ll find answers to some of the most frequently asked questions by investors:

Did the committee change interest rates?

The FOMC decided to keep short-term interest rates unchanged but hinted at potential rate cuts later in the year. In their Summary of Economic Projections, FOMC participants individually outlined their expectations for the future path of short-term interest rates. If the economy follows the projected trajectory, these assessments suggest that interest rates may decline by a range of 0.50% to 0.75% by year-end. Consequently, three-month U.S. Treasury bill yields, currently at 5.375%, could potentially yield between 4.6% and 4.9% by the end of the year.

Why is the committee leaving short-term interest rates so high?

The committee remains concerned about inflation. Participants are “acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. We are strongly committed to returning inflation to our 2 percent objective.”

Is the committee concerned that higher interest rates will slow the economy or increase unemployment?

In the comparison between the current (March) and previous (December) participant projections, the FOMC members anticipate positive trends. Specifically, the median forecast for unemployment has decreased from 4.1% to 4.0%, while the projection for economic growth has risen from 1.4% to 2.1%.

In addition, Chair Powell described risks as two-sided. “We're in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and people's working lives. And so, we do see the risks as two-sided, so it is consequential, we want to be careful and fortunately with the economy growing, with the labor market strong, and with inflation coming down, we can approach that question carefully.”

The Federal Reserve’s balance sheet expanded significantly, starting from less than $1 trillion in early 2008 and reaching $4.5 trillion by the end of the Great Financial Crisis.

Subsequently, due to the COVID-19 stimulus, it surged to nearly $9 trillion. The question remains: Is the Federal Reserve actively managing this situation?

As part of its efforts to tighten monetary policy, the Federal Reserve began to reduce the size of its balance sheet in June 2022. Currently, the FOMC is allowing up to $60 billion a month in U.S. Treasury securities to roll off its balance sheet without being reinvested, along with up to $35 billion in mortgage-backed securities. In total securities holdings have declined nearly $1.5 trillion since the committee began reducing their portfolio.

During this meeting, FOMC participants deliberated on matters concerning reducing the rate of decline in securities holdings. Although no specific decisions were made, the overall consensus within the committee is that it would be appropriate to gradually decrease the pace of runoff. It’s important to note that this adjustment does not imply that the balance sheet will ultimately shrink by a smaller amount; rather, it aims to ensure a more gradual reduction to prevent any disruptions in short-term funding markets or the banking system.

• At the most recent Fed meeting, the Federal Open Market Committee (FOMC) decided to keep short-term interest rates unchanged, but hinted at potential rate cuts later in 2024.
• Assessments of the current economic trajectory suggest interest rate cuts of between 0.50% to 0.75% may be appropriate by year end.
• FOMC members anticipated positive economic trends and made favorable changes to their forecasts for both the year-end unemployment rate and economic growth rate.
• In an effort to reduce the Federal Reserve's expanded balance sheet, the FOMC is allowing up to $60 billion a month in U.S. Treasury securities and $35 billion in mortgage-backed securities to roll off its balance sheet without reinvestment.