MNI: March "Dot Plot" To Show Fewer Fed Cuts, Ex-Officials Say

Federal Reserve officials are likely to signal less urgency to lower interest rates this year than they had in December after disinflation lost momentum in January and February, with a majority penciling in two or three rate cuts for 2024 in projections to be updated Wednesday, former Fed officials told MNI.

The December "dot plot" showed 14 of 19 officials projecting zero to three cuts this year. That number will likely rise as the five officials in the four-or-more camp hedge their bets on how quickly inflation will fall toward 2%, the ex-officials said. If at the same time a couple officials in the three-cuts camp shift in a hawkish direction, the median dot could move to two cuts from three in December.

"It was already a close call. You do expect a committee to be more divided when the policy choice is harder," said Vincent Reinhart, former director of the Fed Board's monetary affairs division. "I think what happens is they stay with three rate cuts this year, although that is a close call, and the dots move up a little for 2025. That's a way of signaling that the cuts come late in the year" this year.

"The reason on net the dots shift up -- although less likely in 2024 -- is that they're going to have a little bit more inflation for 2024 and a little faster growth," he said.

CENTRAL TENDENCY

The median dot garners much investor attention, but it's the central range of views that is most important, and a two-cut median projection would not represent any significant shift in Fed thinking, said former Atlanta Fed President Dennis Lockhart.

"Fifteen of the 19 were in the camp of two to four cuts in December, and the difference between the twos and the threes was one dot. All it would take is a couple people to change to shift the median. It wouldn't take much for that to happen, and it wouldn't surprise me at all," he said.

If some officials now see one fewer cut this year, "it would represent a touch more caution and a touch more willingness to be patient and take their time." (See: MNI INTERVIEW: Fed Will Bide Its Time On Rate Cuts - Lockart)

The quarterly projections are the least useful of the Fed’s communication tools, said ex-New York Fed executive Rick Roberts. The meaning of the composite dots is unclear with wide confidence intervals because each dot is based on individual baseline forecasts that can vary widely, he said.

Roberts predicts the median will move down to two cuts, along with slight upgrades of the year-end unemployment and inflation rates, and the two officials who saw no need for cuts this year in December might get some more company. (See: MNI INTERVIEW: Inflation Risk To US Soft Landing - IMF's Adrian)

"Indeed, we may even see a participant project a slight rate increase by the end of the year," he said. "The Fed should be increasingly concerned about inflationary pressures caused by the wealth effect of the stock market run-up. Wages also remain concerning, although the recent news of a growing labor force was positive."

CHAIR'S MESSAGE

Fed Chair Jerome Powell's tone at the post-meeting press conference will be telling, the former officials said.

“The question is, what kind of message does Powell want to send?," said Robert Hetzel, former Richmond Fed senior economist and research adviser. "The SEP is supposed to be an honest measure of what individuals are thinking, but the reality is the chairman calls the presidents and they pretty much reach a consensus about what kind of message they are going to send to markets."

If inflation doesn't come down and the Fed is forced to hold rates higher for longer, "then you get to the kind of instability and bond rates which the market doesn’t like, and the Fed doesn't like," Hetzel said.

“So I would be very surprised if we see much change from the December SEP."