The Fed report
AGNC’s Take On The FOMC Policy Update
decEMBER 19, 2024
Yesterday, the Federal Open Market Committee (FOMC) released its statement and held a press conference following the conclusion of its December meeting.
FOMC Policy Updates: Key Highlights
- Consistent with market expectations, the FOMC lowered the target range for the federal funds rate by 25 basis points to 4.25-4.50% at its final meeting of 2024, completing the initial recalibration phase of monetary policy.
- Although the Fed lowered its policy rate as expected, it also communicated a hawkish message and more cautious approach with respect to future policy actions, consistent with the Fed’s revised forecast that economic growth is anticipated to be stronger than previously expected and that it will take longer to achieve the Fed’s 2% inflation objective.
- The Fed’s December Summary of Economic Projections (SEP) median rate forecast indicated a slower pace of cuts, with 50 basis points of rate reductions in both 2025 and 2026 and a long run federal funds rate of 3.0%.
- The Fed also implemented a technical adjustment to the rate on the overnight reverse repurchase agreement (RRP) facility, bringing it in-line with the revised federal funds rate lower bound (4.25%); previously, the RRP rate was five basis points higher than the lower bound of the federal funds rate (4.55%).
Our Take
- While market participants had anticipated that the Fed would temper 2025 rate cut expectations as inflation remains somewhat elevated, the revised forecast of two fewer cuts came as a slight surprise and underscores the Fed’s cautious and data-dependent approach to monetary policy decisions.
- Despite this near-term adjustment, the forecast for the longer run neutral rate increased only modestly to 3.0% from 2.875% in the September SEP, and Chair Powell reiterated that the U.S. economy is strong overall and has continued to make significant progress toward the Fed’s dual mandate goals of maximum employment and stable prices over the past two years.
- The technical adjustment to the RRP rate should be a net positive for repo markets over time, as the reduction in rate should improve the relative attractiveness of repo to the Fed’s RRP alternative.
Important Disclosures
The thoughts, opinions, and outlook contained in the “Our Take” section are solely those of AGNC Investment Corp. (“AGNC”) management and are being shared for informational purposes only and should not be construed as investment advice. Neither the Federal Reserve nor any other third party has contributed to or been involved in AGNC’s preparation of these materials. AGNC does not endorse or adopt the views of the Federal Reserve or any third party.
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