We expect the Federal Open Market Committee to keep its policy rate unchanged between a rate of 5.25% and 5.5% at its meeting next week.
But we anticipate that the median rate forecast implied by the dot plot will indicate that the committee now expects two rate cuts this year, for a cumulative rate reduction of 50 basis points, rather than three cuts totaling 75 basis points. If there is any risk implied in the dot plot forecast, it’s that there will be only one 25 basis-point rate cut this year.
Read worldwide forecast of interest rates from RSM’s global team of economists in the latest issue of The Real Economy.
The median long-run federal funds rate projection increased from 2.5% to 2.6% in March. The committee will most likely increase that projection to 2.7% in the new Summary of Economic Projections.
We have thought for some time that the upward migration of the long-run federal funds rate will reside at or above 3%.
While the policy statement will continue to characterize inflation as elevated, the forward-looking Summary of Economic Projections will imply a reduced risk of a reacceleration of inflation, which should assuage concerns of any further rate hikes in this cycle.
In addition, we do not expect any significant changes to the growth, employment or inflation forecast inside the Summary of Economic Projections.
We expect that the committee will update the language on the balance sheet run-off to reflect lower run-off caps for Treasury securities.
Other than the change in the median dot plot rate forecast and the slow migration of the long-run federal funds rate projection, the major emphasis will be on the news conference on Wednesday.
In those remarks, Federal Reserve Chairman Jerome Powell will attempt to manage expectations around the difficult policy decisions coming in the second half of the year.
