Central banks are off to the races


While the Fed’s meeting didn’t deliver much that was new, it at least eased concerns that rate cuts could be delayed. Other central banks grabbed the spotlight, with potentially significant ramifications.


March 21, 2024

Thomas Garretson, CFA
Senior Portfolio Strategist
Fixed Income Strategies
Portfolio Advisory Group – U.S.

If there’s one key takeaway from the slate of central bank meetings this week, we think it’s this: policymakers remain keen to get started on the path of dialing back restrictive policy rates in hopes of sustaining economic expansions, even in the face of inflationary backdrops that remain somewhat murky.

Indeed, while inflationary data across the globe, and particularly in the U.S., has been mixed to start 2024, there has been significant progress since the worst of the inflationary wave peaked some 18 months ago, a story that policymakers are continuing to lean into.

Up to this point there has been a sense that most major central banks would wait for the U.S. Federal Reserve to make the first move, but the Swiss National Bank surprised with a quarter-point cut this week to 1.50 percent, becoming one of the first majors to make a move, perhaps setting the stage for the rest.

On top of that, emerging market central banks, which tend to be even more sensitive to inflationary pressures and dynamics, are already winning the race to cut by a country mile. The Central Bank of Brazil, for example, delivered another half-point cut this week, having now cut rates by 300 basis points since August 2023. Emerging market central banks continuing to ease is perhaps, and likely is in our view, a leading indicator for developed market central banks.

All of which should give more global central banks confidence to soon take their first steps out of the gate, in our view, with the only question now being how they want to pace themselves in this race to ease.

“Putting off an easy thing makes it hard; putting off a hard one makes it impossible”

The biggest, and we would say perhaps singular, question heading into this month’s Fed meeting was whether policymakers would pare back rate cut expectations this year after a pair of elevated inflation data releases in January and February. The short answer is that they did not; the longer answer is that they technically did not.

The median estimate of policymakers’ projections still shows three rate cuts this year, as it did in December, to a target range of 4.50 percent to 4.75 percent, from 5.25 percent to 5.50 percent. But only just barely. The average of the forecasts would suggest just two cuts this year. Put simply, there appears to be a clear divide at the Fed, and the incoming data will certainly tip the scales one way or the other, but our base case remains for three rate cuts this year, likely at the June, September, and December meetings.

The Fed’s updated rate projections

Federal Open Market Committee (FOMC) projections of the federal funds rate at the end of 2024

Federal Open Market Committee (FOMC) projections of the federal funds rate at the end of 2024

The chart shows the central range and median projections for the U.S. federal funds rate as of the most recent Federal Open Market Committee meeting in March 2024, compared to estimates when last updated in December 2023. Both the ranges and the median estimates have moved higher.

  • Central range of FOMC projections
  • Median FOMC projection

Projections shown from December 2023 (previous) and March 2024 (new); central range excludes the three highest and lowest estimates; chart shows upper bound of target range projections.

Source – RBC Wealth Management, Bloomberg, Federal Reserve

Another lingering question of investors going into this week’s meeting was what the Fed plans to do with its balance sheet and its ongoing process of quantitative tightening. Like rate cuts, there was growing concern that the Fed could push back the process of slowing the pace of balance sheet runoff to later in the year, but at the press conference following the meeting Fed Chair Jerome Powell stated clearly that the process is likely to begin “fairly soon.”

What does this mean for markets and investors? It looks to us that the Fed likely isn’t going to procrastinate this cycle. Policymakers have often discussed the risk of cutting too early and setting off another wave of inflation, versus the risk of cutting too late and setting off a recession – which historically has been the case. It seems to us they are now worried more about risks of cutting rates too late, putting the emphasis less on inflation and more on extending the current economic expansion.

With respect to both beginning the process of rate cuts and slowing the pace of quantitative tightening, we believe an earlier start should give policymakers greater chances of success. As Powell put it, tapering quantitative tightening now could mean that they are ultimately able to shrink the balance sheet to a smaller size than if they wait too long, and only react once stress fractures begin to show in money markets, as was the case in 2019.

Similarly, the Fed seemingly thinks that sticking with an earlier start to cuts this year could ultimately mean fewer cuts down the road. For the first time since 2018, policymakers see a higher “longer run” rate level, now at approximately 2.75 percent, up from 2.50 percent previously.

Jumping the gun?

As always, we think it’s of utmost importance to remember that rate cuts won’t necessarily mean that monetary policy will be easy. This is a matter of calibrating policy rates to the progress made to this stage on inflation to reduce risks around real economic damage. Central banks’ restrictive policy stances will remain in place for some time, in our assessment.

But while global inflation dynamics have been favourable, it remains more of a lingering risk in the U.S., particularly as economic activity remains robust and labour markets tight. Though Powell was, once again, vague in giving markets an idea of what specific data policymakers are watching, the data we watch continues to support the idea that recent inflation data was a blip, and that the trend lower remains in place.

Despite recent hiccups, numerous metrics still point to inflation trending lower

Two indexes of price pressure based on business surveys

The line chart shows two indexes of price pressure based on business surveys: the Philadelphia Fed’s Business Outlook Survey Diffusion Index Current Prices Received and the National Federation of Independent Business (NFIB) Small Business Higher Prices Index. Also shown is Core PCE (personal consumption expenditures) inflation through January 2024. The chart covers the period from March 2014 through March 2024. Both indexes and inflation have moved lower in 2024 relative to their 10-year highs in 2021 and 2022.

  • NFIB Small Business Higher Prices (LHS)
  • Philadelphia Fed Current Prices Received (LHS)
  • Core PCE inflation y/y (RHS)
  • Business survey results shown are three-month moving averages for the Philadelphia Fed’s Business Outlook Survey Diffusion Index Current Prices Received and the National Federation of Independent Business (NFIB) Small Business Higher Prices Index.

    Source – RBC Wealth Management, Bloomberg, NFIB

    Data released this week from the Philadelphia Fed on prices received by businesses in March fell to some of the lowest levels of the past year. This squares with data from the National Federation of Independent Business, where the percentage of small businesses seeing higher prices is also fading to fresh lows. Each tends to be a leading indicator of actual inflation data.

    Risks certainly remain, but we continue to be encouraged that central banks appear keen to be proactive at this stage, and even if they are quick out of the gates, we expect a pretty slow race. And markets seem to agree, with fresh records for the S&P 500 matched by strong rallies in most global equity markets this week.

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    Thomas Garretson, CFA

    Senior Portfolio Strategist
    Fixed Income Strategies
    Portfolio Advisory Group – U.S.

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