The Federal Reserve held steady in its battle against inflation Wednesday, maintaining its benchmark interest rate in a range between 5.25% and 5.5%. The central bank has now left its key rate untouched for three meetings in a row dating back to July, suggesting that it has reached a peak in the current cycle.
While the move was widely expected, the Fed did deliver some new insights into how it sees the economy and its rate policy developing over the next 12 months.
Some nuts and bolts: Projections from members of the Federal Open Market Committee indicate that they expect the central bank to cut rates by 0.75 percentage points in 2024, or three cuts of 0.25 percentage points each. Fed officials estimated that the benchmark rate would be at 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% at the end of 2026.
Committee members think the economy will continue to expand without recession, though growth is expected to weaken next year. Fed officials projected growth rates of 2.6% for the current year, 1.4% for 2024 and 1.8% for 2025, with a long-term growth tendency of 1.8%. Unemployment is projected to rise slightly, ending the year at 3.8% and increasing to 4.1% in 2024 and 2025.
Inflation is projected to continue its downward trend, with the personal consumption expenditures price index rising by 2.8% in 2023, 2.4% in 2024 and 2.1% in 2025 – before finally falling to the Fed’s 2% target in 2026.
What experts are saying: Asked if he thought inflation has already been beaten, Fed Chair Jerome Powell told reporters that while he is pleased with the progress he has seen in the downward path of inflation so far, he wants to see more progress before coming to any firm conclusions. “No one is declaring victory,” he said. “That would be premature.”
Still, analysts saw a lot to like in Powell’s comments. David Russell, Global Head of Market Strategy at TradeStation, said the Fed’s message was more dovish than expected, since it recognized that inflation is indeed falling. “Jerome Powell seems to be done taking the punch bowl away,” he said, per Bloomberg.
Traders on Wall Street certainly seemed to agree, with the Dow Jones Industrial Average rallying more than 500 points to close above 37,000 for the first time, as investors bet on a more accommodative stance by the Fed.
Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, said that although Powell won’t say so explicitly, it looks like the Fed has won its battle against inflation. “The third time’s the charm as the Fed has now refrained from hiking rates for the third consecutive meeting, investors can now fully believe the Fed is done hiking rates for this cycle,” he said. “Furthermore, the dovish tone coming out of the meeting minutes with 75 basis points of rate cuts, not only signals the Fed is declaring victory on inflation, but moreover sets the table for Powell and team to manufacture a soft landing for the economy.”
One analyst likened the Fed’s announcement to a delightful holiday present. Joseph Brusuelas, chief economist at the consulting firm RSM, wrote that the “major takeaway from the December policy meeting is that the Federal Reserve is forecasting a soft landing, full employment and intends to reduce its federal funds policy rate by at least seventy-five basis points in 2024 to support the ongoing business expansions.” He added that “from our vantage point that is about the best holiday gift a central banker can bestow upon the investment community, policymakers, and the public.”
