US Dollar downside is limited – BBH

Economists at BBH analyze US Dollar’s outlook after the perceived dovish Fed hold.

The Fed is unlikely to deliver 75 bps of rate cuts this year

For 2024, the Fed’s new funds rate projection continues to imply 75 bps of rate cuts despite higher GDP growth estimate (2.1% versus 1.4%) and higher core PCE inflation forecast (2.6% versus 2.4%). The combination of expected lower policy rates, stronger growth, and higher underlying inflation bodes well for risk assets and is weighing on USD.

In our view, the outcome of the Fed March policy meeting is not a dovish slam dunk. First, there was no indication from the Fed that it had gained greater confidence that inflation is moving sustainably towards 2%. Second, the median Fed funds rate projections for 2025 and 2026 were both lifted by 25bps to 3.875% and 3.125%, while the longer-term funds rate forecast is roughly 6bps higher at 2.6%. Third, the 2024 funds rate estimate was just one dove away from a hawkish shift.

Importantly, we doubt the Fed will deliver 75 bps of rate cuts this year in part because of the encouraging US economic growth outlook. As such, USD downside is limited.