Lockhart: Fed Dots to Signal 1or 2 Cuts for 2024

Tomorrow’s FOMC meeting is all about the Dots. These are the forecasts generated from the Fed’s quarterly projections for the economy and interest rates carried in its Summary of Economic Projections, the “SEPs.” Because Inflation came down sharply in the second half of 2023, then stalled in the first three months of this year and has yet to “sustainably” - to use Fed Chair Powell’s favorite adjective - start coming down again. This is why the Fed is once again not expected to follow through on its tilt toward rate cuts in 2024 which were signaled at both their December and March meetings. And why all the attention is now the Dots.

Former Atlanta Fed president Dennis Lockhart has been particularly prescient on his analysis of what the FOMC is likely to do with the Dots. Ahead of the March meeting, when most were still betting that officials would stick with their steady March toward 3% cuts, he predicted the median Dot could signal two cuts instead. Instead, the median Fed Dot stayed at three even as more officials called for two cuts or one.

So what is Dennis looking for now?

He says the median Dot will fall to two or even one rate cut this year. “If I could forecast 1-1/2 cuts I would,” he said with a smile when he joined me for our interview today. I asked him if we could see some individual Dots signalling no cuts at all in 2024, and he said “it’s certainly a plausible scenario…because inflation has gone sideways for awhile.”

Lockhart says this could turn out to be an inflation situation so sticky so sticky that it means rates stay higher for longer as the mode for Fed policy now because “the economy is peforming so well from an employment point of view…I think think the committee can be patient and not take undue risk by just holding (rates steady) if that’s what’s called for.”

A couple more items to get you ready for the Fed decision at 2pm ET on Wednesday.

What does Powell say at his presser about uncertainty at the Fed as to how restrictive the monetary policy is now, which we saw expressed in the minutes of the May meeting? More doubts, less certainty about when - and if - the Fed should cut rates this year? Dennis says this is a big one because the more officials express this view, the more plausible rate hikes could become.

Also from the minutes of last meeting various FOMC member worried about lingering forces of financial instability in the banking system. When I asked Dennis, who was a banking executive for many years before he when to the Atlanta Fed, if he’s concerned about financial stability, he replied, “I’m always concerned about financial stability, because things can happen and you know shocks can come of nowhere and disrupt what is a very intricate system, and one that can unravel very quickly.” For now he says the story line at the Fed is likely to be that officials are watching banks closely especially when it comes to commercial real estate pain that may lie ahead at regional banks where much of the CRE is concentrated.

Now you can hear and see exactly what Dennis said.