Federal Open Market Committee (FOMC) met this week and decided to keep the Fed Funds rate unchanged. However, the Federal Reserve’s updated forecasts for key economic metrics projected that interest rates after 2024 will decline more gradually than had been projected in their last forecast.
The FOMC meets 8 times per year but only releases an economic forecast at 4 of the meetings. The Fed forecast presents estimates for economic metrics for December of each year through 2026, and a “longer run” forecast which reflects their view of the output of the economy if operating at equilibrium. The consensus Fed forecast is developed by the combining the forecasts of 18 economists. Each of the economists assumes that the Fed will follow “appropriate” monetary policy during the term of the forecast, although their individual ideas of what that policy is may vary.
Interest rate projections raised
The headline news coming out of the recent Fed meeting was their decision to again keep interest rates unchanged. They also kept their estimate of the appropriate Federal Funds interest rate for year-end 2024 at 4.6 percent. Given that the current Fed Funds target interest rate range is 5.25 to 5.5 percent, this implies that the rate will see three 0.25 percentage point rate cuts by the end of the year.
The Fed now predicts that the appropriate Federal Funds rate for 2025 will be 3.9 percent, up 0.3 percentage points from their December forecast, and returning to the rate projected in their September forecast.
The Fed’s prediction of the appropriate Federal Funds rate for 2026 is 3.1 percent, up 0.2 percentage points from the rate projected in the December forecast. The projection for the long-run interest rate was also raised in the March forecast, rising 0.1 percentage point to 2.6 percent.
A history of the forecasts for the Federal Funds rate is given in the first chart, below.
Inflation outlook nearly unchanged
The Federal Reserve’s preferred inflation measure is based on the Personal Consumption Expenditures (PCE) survey, rather than the more familiar Consumer Price Index (CPI). Compared to last month’s forecast, only one change was made to the predicted level of PCE inflation. The year-end reading for 2025 was raised 0.1 percentage point to 2.2 percent. The projection for year-end inflation for 2026 remained at 2.0 percent, the Fed’s target.
The history of the Fed’s recent PCE inflation forecasts is shown in the next chart.
GDP growth projections raised
Fed’s current forecast for GDP growth in 2024 was revised significantly higher, rising 0.6 percentage points to 2.1 percent. The Fed’s GDP forecast for 2025 was raised 0.2 percentage points to 2.0 percent while the GDP forecast for 2026 rose 0.1 percentage point to 2.0 percent.
Given that inflation is expected to reach the Fed’s target rate by the end of 2026, the fact that the projected Fed Funds rate at the end of 2026 remains above the long-run rate may be because GDP growth is expected to remain above the Fed’s equilibrium level for the economy.
Recent Fed GDP forecasts are illustrated in the next chart, below.
Unemployment forecast to rise more slowly
The Fed forecasts that the year-end unemployment rate will be 4.0 percent in 2024, down 0.1 percentage point from the level in December’s forecast. The unemployment rate forecast for year-end 2025 was unchanged from December’s forecast at 4.1 percent while the forecast for 2026 was revised downward to 4.0 percent.
The history of the Fed’s recent unemployment rate forecasts is shown in the next chart.
The next updates to the Federal Reserve’s forecasts for the economy will come after the June 2024 FOMC meeting.
