Fed holds rates steady, indicates three cuts coming in 2024

Fed holds rates steady, indicates three cuts coming in 2024

The Federal Reserve, in its latest meeting, opted to keep its key interest rate steady within the targeted range of 5.25%-5.5%, marking the third consecutive time it has maintained this level. The decision reflects the central bank’s assessment of the economy, with inflation showing signs of easing. Despite holding rates steady, the Federal Open Market Committee (FOMC) signaled the possibility of multiple rate cuts in 2024, anticipating at least three quarter-percentage point reductions. While market expectations initially leaned towards four cuts, the FOMC’s projections indicate a more cautious approach.

The committee’s “dot plot,” outlining individual members’ expectations, suggests an additional four cuts in 2025, totaling a full percentage point reduction. Three more reductions are anticipated in 2026, potentially bringing the fed funds rate down to the range of 2%-2.25%. Following the meeting, market reactions surpassed expectations, with the Dow Jones Industrial Average surging over 400 points, surpassing 37,000 for the first time.

The FOMC’s decision comes against the backdrop of a brighter inflation picture, with inflation rates easing over the past year. Federal Reserve Chair Jerome Powell emphasized the positive news, noting that inflation has moderated without a significant increase in unemployment. The committee acknowledged the economic slowdown, indicating a shift from the previous meeting’s statement that economic activity had expanded at a strong pace.

In addressing concerns about potential policy tightening, the statement now includes language indicating that the committee will consider “any” more policy tightening, reflecting a potential shift away from further interest rate hikes. The Fed has been allowing up to $95 billion a month in proceeds from maturing bonds to roll off its balance sheet, a policy tightening measure that has continued.

The Fed’s outlook for inflation includes expectations of core inflation falling to 3.2% in 2023, 2.4% in 2024, and reaching the 2% target in 2026. Economic data released this week indicates stable consumer and wholesale prices in November. Powell acknowledged the slowdown in economic activity but highlighted that GDP is on track to expand around 2.5% for the year as a whole.

While the FOMC has upgraded its GDP growth projection for 2023 to a 2.6% annualized pace, projections for the unemployment rate remain largely unchanged. The central bank has emphasized its willingness to respond to any flare-up in inflation but appears more patient as it assesses the impact of previous policy tightening on the U.S. economy. The focus on managing inflation comes amid political challenges for President Joe Biden, with the Fed keeping a close eye on economic indicators and remaining prepared to act if necessary.