In a surprising move, the Federal Reserve has decided to maintain its projections for three interest rate cuts in 2024, despite an improving outlook for economic growth. The Federal Open Market Committee (FOMC) released its latest "dot plot" projections in March, revealing a median Federal funds rate of 4.6% for the year 2024.

With the current Fed funds rate ranging between 5.25% and 5.50%, the dot plot indicates three cuts of a 0.25 percentage point each. This aligns with the previous Summary of Economic Projections (SEP) published in December, which also forecasted three rate cuts for 2024.

Interestingly, the projected change in real GDP for 2024 saw an upward revision in the March projections. The growth forecast rose to 2.1% from 1.4% in December, indicating a more positive economic outlook. Similarly, the core Personal Consumption Expenditures (PCE) inflation projections experienced a slight increase, ticking up to 2.6% from 2.4%.

The Federal Reserve's decision to stick with its projections for rate cuts in the face of an improving economic landscape comes after recent inflation reports for January and February dampened hopes that the central bank had price increases under control. Market traders had already begun scaling back their rate cut expectations ahead of the update from the Federal Reserve.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, pointed to the significance of the projections, stating, "The FOMC's SEP continues to show [0.75%] of rate cuts this year, even as the core PCE estimate was increased. This suggests that the upside seen in realized inflation early this year is being dismissed by monetary policymakers."

During the news conference on Wednesday, Fed Chair Jerome Powell acknowledged the recent inflation reports but stressed that they may have been distorted by seasonal factors, particularly in January. Powell stated, "I take the two of them together, and I think they haven't really changed the overall story, which is that of inflation moving down gradually, on a sometimes bumpy road, toward 2%."

While the overall projections for rate cuts in 2024 remained unchanged, there were some minor adjustments within the dot plot. In the December projections, there was a greater divergence among individual Fed members, with two voters indicating no cuts in 2024 and another forecasting six reductions. However, in the March projections, the most aggressive prediction has been scaled back to just four cuts.

It's worth noting that the median projection for the fed funds rate in 2025 saw an increase to 3.9% from 3.6%, suggesting one less cut. The long-run projection for the benchmark rate also rose, edging up to 2.6% from 2.5%.

As the Federal Reserve maintains its stance on rate cuts despite positive economic indicators, market participants will closely monitor future developments to gauge the central bank's approach in navigating the path to economic recovery and controlling inflation.