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THE LATEST AND GREATEST FROM THE FED

At 2:02 p.m. on March 20th, I am writing to discuss the Fed’s decision to keep the Fed Funds rate between the 5.25% to 5.50% range. The outlook remains that the Fed projects that there will most likely be three quarter-point rate cuts this year. At the same time, they forecast fewer rate cuts in 2025 than previously expected. This is the fifth meeting where there has been no change in the Fed Funds rate.

This really came as no surprise because we still view the strength of the employment market and the stubbornness of inflation as too meaningful to allow the Fed to cut rates. Within the announcement, there was a reiteration of the Fed’s desire to reduce the size of its balance sheet by as much as $95 million per month. The “dot plot” is fairly tight, with nine individuals expecting two or fewer rate cuts this year, and ten officials believe that there will be three or more quarter-point rate cuts this year. It is important to keep in mind that any projection of rate cuts is not a plan.

From the data, we also saw that the Fed raised their expectation for inflation from 2.4% to 2.6%, and the growth forecast boosted to 2.1% from 1.4%. The Fed is recognizing that it is increasingly unlikely that we will see inflation fall near the 2.0% target during this calendar year. The continued strength in the employment market and wage growth are both driving inflation. Government spending is not helping because the Biden administration has a budget that will continue to add to the debt and deficit, and is focused on their priority of moving the U.S. to electric vehicles; this move will only exacerbate inflation and will make the Fed’s job even harder.

As I write this, the 10-year Treasury is only slightly changed, and the S&P 500 is up about 20 basis points. As most assumed, it appears that this announcement was largely priced into the market. Oil is down about 2% today, but it has rallied over $11 per barrel since the beginning of the year and this has and will continue to contribute to inflation.

We continue to think that the juxtaposition of employment and inflation will be key for the next move for the Fed. There have been a number of announced job cuts, and it is reasonable to assume that a softer job market will lead to lower spending and take some of the pressure out of inflation. At the same time, prices remain stubbornly high, and this could lead to stagflation. A silver lining in all of this is that the Fed has increased the Fed Fund Rate to a level where they can make drastic cuts, if needed, to increase liquidity in the economy while making a statement about helping to drive growth. More to come on this topic.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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