This past Wednesday, the Federal Reserve held their March FOMC meeting where they left the fed funds rate unchanged for the fifth consecutive meeting. 

The Summary of Economic Projections (SEPs)

As they do on a quarterly basis, committee members provided their updated economic projections. While many economists expected the year-end fed funds rate projection to rise, it did not. The median rate remained at its 4.6% level despite the central tendency of projections rising 20 basis points on either side of the range. The 2025 projected fed funds rate rose 30 basis points to 3.9% – effectively moving one rate cut off the table for next year. The “longer run” fed funds rate also rose 10 basis points, which is likely a reflection of improved labor supply factors, like productivity and immigration, being important drivers of economic growth.

While all eyes were set on the Fed funds rate expectations, the other economic projections also had some changes. The change in real GDP projection rose 70 basis points this year, 20 basis points in 2025, and 10 basis points in 2026. The median Personal Consumption Expenditures (PCE) inflation projection rose 10 basis points in 2025 while all else held equal. The unemployment rate projection saw a 10 basis point drop in 2024 and 2026.

The Presser

In June 2022, the Fed began gradually reducing the size of their balance sheet by allowing treasury and MBS securities to mature rather than be reinvested (otherwise known as quantitative tightening). The balance sheet peaked in 2022 at nearly $9 trillion and has since been reduced to $7.5 trillion. Going into the press conference, there was an expectation that Powell would give us hints as to when the committee expects to begin slowing the pace of quantitative tightening. Powell repeatedly said it would be appropriate to slow the pace “relatively soon,” hinting that a reduced pace could be announced at their next meeting if the intermittent data allows.

Powell also made it clear that he was not painfully worried about the hotter-than-expected January and February inflationary data. He pointed out that there seemed to be some seasonal effects in the January data, and that February inflation exhibited progress towards their 2% goal when compared to January. Still, Powell made it clear that the committee is “looking for data that confirms the kind of low readings that we had last year, and gives us a higher degree of confidence that what we saw was really inflation moving sustainably towards 2%.”

Ultimately, it is clear that each meeting going forward is “live” and the timing of rate cuts will depend entirely on the data to come.

Time for the usual check-up…

Economy

Late last month, fourth-quarter GDP growth was revised lower by 10 basis points to a still very strong 3.2%. The market was focused mainly on earnings announcements for the majority of February. Of S&P 500 companies that reported earnings, 76.1% surprised to the upside which is slightly above the recent average. Notably, only 54% of the consumer discretionary sector of the S&P 500 beat revenue estimates – down from 62% the quarter prior.

February retail sales also came in softer than expected, only rising +0.6% versus the +0.7% estimate. On top of the disappointing February reading, the January number was revised down to -1.1% from the initial estimate of -0.8%. The disappointing February retail sales paint a picture of weakening consumption growth. When consumption weakens, we always watch for involuntary inventory accumulation as unintended inventory builds can negatively impact growth in future quarters. Were there to be an inventory “glut,” any further weakness in the labor market could limit what consumers are willing to spend to clear that inventory.

Inflation

The week before the FOMC meeting, February headline consumer prices (CPI) data came in at +0.4% month over month, which was in line with expectations. Core CPI, which strips out more volatile food & energy prices, also came in at +0.4% month over month – 10 basis points more than the +0.3% expectation. On a year-over-year basis, core inflation declined from +3.9% in January to +3.8% in February. So, while the CPI number ultimately disappointed versus expectations, it is still moving in the right direction. Digging even deeper, the closely watched core services inflation metric continued to decline from +0.7% in January to +0.5% in February helped by continued disinflation in shelter prices. Core goods prices ran hot, coming in at +0.1% from the -0.3% in January – driven by used vehicle and apparel prices.

February producer prices (PPI) created some concern with headline PPI rising +0.6% month over month – twice the expectation. Still, on a year-over-year basis, PPI is running at +1.6%, which, while well above the +1.0% in January, is still below the Fed’s inflationary target. Core PPI rose +0.3% on a month-over-month basis – 10 basis points above expectations. On a year-over-year basis, core PPI was flat with January’s reading of +2.0%. As was the case with CPI, goods inflation ran hot while services inflation continued its slow decline. As expected, the bond market responded negatively to the February inflationary reports – with most of the yield curve shifting 25 basis points higher.

Also of importance to the Fed was February average hourly earnings, which grew only +0.1% – well shy of the +0.3% estimate. This brings the year-over-year increase in hourly earnings to +4.3% from +4.4% in January.

Job Market

The labor market continues to be incredibly resilient, but cracks are beginning to reveal themselves. While February nonfarm payrolls came in higher than expected by the count of +75,000, the prior two months of data were revised lower by a combined -167,000. Along with the payroll data came the February unemployment rate of 3.9%, which was up from 3.7% in January. The loss of jobs was driven mainly by the manufacturing and temporary help sectors, which are naturally more cyclical.

Weekly initial jobless claims continue to hover in the low 200,000s, but continuing claims have gradually risen from 1.59 million at the end of 2022 to 1.81 million at the start of March, indicating that workers are having a harder time finding another job.

The January Job Openings Survey (JOLTS) continues to slowly decline, though still high at 1.45 jobs for every unemployed worker in the US. However, a continued decline in the quits rate still implies there is less confidence among the employed in finding a new job. As we saw in the February hourly earnings report, this should mean less pressure on wages going forward.

 It is clear that the still-resilient labor market is softening slowly. As we have mentioned in prior notes, recessions are almost always accompanied by aggressive increases in unemployment – not sub-30 basis point moves. Additionally, we expect labor productivity improvements to be a key element in maintaining non-inflationary economic growth going forward as artificial intelligence becomes a part of everyday life in offices around the world. We would expect this to bring the labor market back into balance over the next several years – if higher rates and increased immigration do not.

So, What’s Next?

As Powell has said time and time again, everything that happens next is data-dependent. On the 28th, we will see another revision to fourth quarter GDP along with updated consumer sentiment surveys. On the 29th, we will see February data for the PCE index – the Fed’s preferred inflation gauge. In April, we will see a slew of new data including the March jobs report, CPI, PPI, and a series of new jobless claims reports. As always, we will watch these data releases closely and communicate our takeaways to our clients.

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