Dot Plot Still Shows Next Rate Hike Not Until at Least 2024

• The FOMC kept monetary policy unchanged in its March 17 statement. 

• The FOMC appears unconcerned about a potential acceleration in inflation. 

• Although the dot plot still indicates no increase in the fed funds rate until at least 2024, near-term growth and inflation expectations were somewhat higher. 

• PNC’s baseline forecast is for the FOMC to increase the fed funds rate in late 2023. 

• Stock prices rose in the immediate aftermath of the statement.

In its March 17 statement, the Federal Open Market Committee maintained its commitment to keeping both short-term and long-term interest rates low to support the ongoing economic recovery. The two paragraphs on the outlook for monetary policy were unchanged from the previous statement, on January 27. The FOMC said that it expects to keep the federal funds rate, its key short-term policy rate, in its current 0.00% to 0.25% range until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” That is, the FOMC wants to see a very strong labor market and inflation consistently at 2% before raising the fed funds rate.

The FOMC also said that it will maintain its asset purchases ($80 billion per month of long-term Treasurys, $40 billion per month of mortgage-backed securities) “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Here, the FOMC wants to see a sustained improvement in the job market and a consistent acceleration in inflation (not necessarily to 2%) before cutting back on asset purchases.

In the section of the statement on current economic conditions, the statement noted that growth has accelerated somewhat after weaker growth in late 2020 and early 2021. However, the statement also noted that “weakness [is] concentrated in the sectors most adversely affected by the pandemic,” such as travel and leisure/hospitality services. The March 17 statement noted that “inflation continues to run below 2 percent”. This was a notable change from the previous statement, which said that “weaker demand and earlier declines in oil prices have been holding down consumer price inflation.”

The statement was approved unanimously.

The near-term economic outlook is much improved according to the Summary of Economic Projections, or “dot plot,” that accompanied the statement. The median forecast for GDP growth in 2021 was 6.5% in the March 17 statement, revised up from 4.2% in the previous SEP on December 16. There were smaller revisions to growth in 2022 and 2023. Consistent with the stronger outlook for GDP growth, the median forecast for the unemployment rate in December 2021 was moved lower to 4.5%, from 5.0%. The median unemployment rate forecast for December 2022 and 2023 is also somewhat lower than in the December 2020 dot plot.

The inflation forecast was somewhat higher on March 17 than in December. The median forecast expects both overall and core PCE inflation, on a year-over-year basis, to be somewhat above the committee’s 2% objective by late 2021, before receding somewhat to around 2% in 2022 and 2023.

The majority of FOMC participants (11 of 18) expect the fed funds rate to remain in its 0.00% to 0.25% range at least until 2024. However, a minority of participants have forecasted multiple rate increases by the end of 2023.

In its March 17 statement, the FOMC pushed back against market participants who have been expecting inflation concerns to lead the FOMC to remove some its policy accommodation over the next couple of years. The FOMC statement reiterated that the committee does not expect to raise the fed funds rate until inflation is consistently at or above 2% and the economy is at full employment. And according to the dot plot most FOMC participants still do not expect the next increase in the fed funds rate until at least 2024. Similarly, the statement expressed little concern about the potential for higher inflation.

The March 17 FOMC median inflation forecast for 2021 is somewhat higher than it was in December 2020, but inflation in 2022 and 2023 is still expected to be right around the FOMC’s 2% objective. This suggests that participants are largely unconcerned about the potential for a sustained acceleration in inflation that would lead the FOMC to raise the fed funds rate sometime in the next couple of years.

PNC’s March baseline forecast is for the next fed funds rate hike to come in late 2023, earlier than the FOMC is now projecting. PNC expects that by late 2023 the labor market will meet the Fed’s goal of maximum employment and inflation will be consistently at the Fed’s 2% objective.

PNC also expects the FOMC to start to reduce its asset purchases in early 2022. At that point the labor market will have improved substantially and underlying inflation, looking through transient factors, will have moved higher toward the 2% objective.

Market response to the statement was positive. The S&P 500 jumped right after the release, as investors welcomed continued low interest rates. Short-term yields were largely unchanged but yields in the middle of the Treasury curve (2 to 10 years) fell somewhat with reduced expectations for near-term Fed tightening.

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