The Fed’s March Statement

Estimated reading time: 4 minutes

Keep Your Fed Held High

I usually get excited for Fed days because they can be some of the most eventful market sessions of the year. But this one was about as exhilarating as watching golf on TV for me, given its lack of surprises, and very modest changes to the Fed’s outlook on the economy.

Maybe a break in the action is good, a period of time when things are fine and dandy, with an absence of any dramatic statements or market repricings. That seems to be where we are in the cycle right now — a comfortably quiet hum of economic activity and labor market strength.

One of the things that’s critical for the Federal Open Market Committee (FOMC), and for investors, is to recognize when the incoming data has either changed, or no longer supports our thesis. The FOMC did just that and adjusted their summary of economic projections to reflect the surprisingly strong GDP data, and higher than expected inflation numbers that came in for January and February.

The number markets were most anxious about was the projected fed funds rate at the end of the year. There was a possibility that Powell would signal markets should expect even fewer cuts, but the median dot remained at three cuts in 2024 and equity indexes ripped higher on the news (or lack thereof).

Leave the Past Behind

One of the points Powell made during the press conference was about the pre-pandemic level of rates having been abnormally low. The spirit of the message was that we shouldn’t anchor our expectations to a period that was far outside the typical monetary policy playbook.

In other words, he reiterated that rates would remain higher for longer, and that our recent gauges of “neutral” were probably off-base. I’ll paraphrase further and say that he basically told us to take our shoes off and get comfortable, rates are going to stay higher than we’re used to.

Given the market’s resilience in the face of restrictive policy and higher Treasury yields, it begs the question of whether higher rates just seemed scary because we weren’t conditioned for them. And maybe these last couple years have been our way of getting in shape?

We can see in the chart above that during expansionary (or at least non-recessionary) periods, the fed funds rate has tended to be at least at its current level, if not higher. Except, of course, for that abnormal period between 2008-2016.

If we’re returning to a more normal monetary policy environment in an economy that can produce sustainable growth and not fold under inflationary pressures, perhaps higher rates are the appropriate longer-term approach.

The data so far certainly supports that thesis, but this chart still feels unfinished. Even by just eyeballing it, I can’t help but think that we’re nearing the point where things tend to change, not march smoothly onward. Until those first Fed cuts come closer into view though, we seem to be in a peaceful place.

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