In its statement this afternoon, the FOMC adopted an easing bias but tried to cool expectations for a near-term cut in the federal funds rate. Today’s statement said, “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” This certainly suggests that the FOMC does not plan to cut the federal funds rate at its next meeting, on March 19 and 20.

That said, today’s statement is the first time during the current monetary policy cycle where the FOMC has discussed the potential for rate cuts. The previous statement, on December 13, had a tightening bias, mentioning “the extent of any additional policy firming that may be appropriate to return inflation to 2% over time.” 

The FOMC maintained the fed funds rate in its current range of 5.25% to 5.50%, the fourth straight meeting without changing the rate. This followed a period from early-2022 to mid-2023 where the FOMC aggressively raised the federal funds rate to slow inflation. 

Today’s statement contained a new sentence that “the Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.” This indicates that concern over inflation is easing somewhat, and that the FOMC is watching for indications of a softer labor market. 

In discussing current economic conditions, today’s statement said that recent “economic activity has been expanding at a solid pace.” The December 13 statement said that “economic activity had slowed from its strong pace in the third quarter.” The new language acknowledges strong fourth quarter GDP growth, 3.3% at an annualized rate in the advance estimate. Today’s statement, similar to the one on December 13, noted strong but moderating job growth, a low unemployment rate, and slowing but still-elevated inflation. 

The FOMC announced no change regarding the Federal Reserve’s balance sheet. The central bank continues to let some long-term Treasurys and mortgage-backed securities mature without replacing them on the balance sheet; this is reducing the size of the balance and sheet and putting upward pressure on long-term interest rates. 

The FOMC adopted an easing bias in today’s statement, but also indicated that rate cuts are unlikely to happen at the FOMC’s next meeting, in mid-March. The FOMC is acknowledging slower inflation but wants to see further indication that inflation will continue to move toward the committee’s 2% objective. PNC’s baseline view is that the FOMC will first cut the fed funds rate at its meeting on May 1, by 25 basis points. PNC then expects the FOMC to cut the fed funds rate three more times in 2024, each time by 25 basis points, taking the rate to 4.25% to 4.50% by the end of 2024. 

It also appears that the Fed is not ready yet to reduce its balance sheet runoff. The committee would like to give financial markets advance notice of a reduction in runoff, and today’s statement made no mention of any potential reduction. 

In his press conference, Fed Chair Powell said that getting inflation to 2% is “not assured,” justifying continued tight monetary policy. Even if the FOMC cuts the fed funds rate modestly, monetary policy would still be weighing on growth, just with less drag. He also said that the fed funds rate is likely at a peak during this tightening cycle, and that the FOMC is likely to cut the fed funds rate sometime this year, although he said nothing more specific on timing. He did note the potential for damage to economic growth if monetary policy remains too tight and the FOMC waits too long to cut the fed funds rate.