Federal Reserve’s Bullish Economic Growth Projections Drive Market Optimism

Ahead of the Fed’s meeting this week, everyone was focused on dots. But the most important number offered by Fed officials was the FOMC’s surprisingly bullish expectations for economic growth, revised upward, as our Chart of the Week shows.

Key Points:

1. Previous Expectations vs. Current Outlook: In December, the market cheered after hopes for rate cuts were restored following pleasing inflation numbers. However, economic growth projections for 2024 had fallen to 1.4% from September’s 1.5% projection. Now, despite a pause in disinflation, the FOMC projects 2024 growth at 2.4%, nearly double the previous forecast from just three months ago.
2. Market Reaction and Implications: The confirmation of a strong economic outlook, alongside the Fed’s expectation for three rate cuts this year, has propelled stocks to new highs. While lower rates traditionally benefit stocks, a strong job market and consumer confidence also contribute to increased profitability and stock prices.
3. Fed’s Certification of Market Sentiment: The Fed’s bullish growth projections validate the market’s optimism. Despite concerns about high interest rates impacting corporate spending and the housing market, Fed Chair Jay Powell emphasized that a strong economy and stock market align with the Fed’s objectives.
4. Focus on Inflation Data: The key factor influencing the timing of rate cuts remains convincing inflation data, which has yet to materialize. Powell indicated that until substantial inflationary pressures emerge, obsessing over the timing of rate cuts may not be the most productive use of time.

Conclusion: While there is anticipation regarding the Fed’s future actions, particularly regarding rate cuts, the absence of substantial inflationary pressures suggests that obsessing over the timing of rate cuts may not be the most productive use of time.