US Federal Reserve signals end of interest rate hikes, sees cuts in 2024
- Noting that inflation has eased, 17 of 19 US central bank officials projected that borrowing costs would be lower in the coming year
- Fed Chair Jerome Powell flagged the uncertainty of the outlook, however, and said he could not definitively rule out higher rates at this point
The US Federal Reserve held interest rates steady on Wednesday and signalled in new economic projections that the historic tightening of US monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024.
In a new policy statement, US central bank officials took explicit account of the fact that inflation “has eased over the past year”, and said they would watch the economy to see if “any” additional rate hikes are needed – implying directly that, after months of aggressive tightening and a bias towards moving rates higher, they may not need to raise them again.
Indeed, a near unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024 than it is now – with the median projection showing it falling three-quarters of a percentage point from the current 5.25 to 5.50 per cent range. No officials see rates higher by the end of next year.
Speaking in a press conference following the end of a two-day policy meeting, Fed Chair Jerome Powell flagged the uncertainty of the outlook and said he could not definitively rule out higher rates at this point, even as officials looked toward a lower policy rate.
“While we believe our policy rate is at or near its peak for the tightening cycle, the economy has surprised forecasters,” Powell said. Because of the unpredictable nature of the economy, he said that while Fed officials “do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table” if it’s needed.
The newest projections also showed policymakers see the risks to inflation and employment – the two planks of the Fed’s dual mandate – were coming into better balance.
US stocks jumped following the release of the statement and projections and continued climbing during Powell’s press conference, while the US dollar dropped against a basket of currencies. US Treasury yields also fell further.
“A marginally more dovish-than-expected ‘dot plot’ doesn’t exactly provide the pushback on market pricing and looser financial conditions that most had been expecting,” said Michael Brown, a market analyst at TraderX, referring to the distribution of Fed officials’ policy rate projections.
Traders of futures contracts that track expectations for the Fed’s policy rate raised the probability that the central bank would cut rates in March of next year to more than 60 per cent following the policy decision and release of the projections.
For an institution that has been reluctant to declare victory over inflation that spiked last year to a 40-year high, the updated projections and new statement mark a notable shift in tone and outlook.
Headline personal consumption expenditures inflation is seen ending 2023 at 2.8 per cent and falling further to 2.4 per cent by the end of next year, within striking distance of the Fed’s 2 per cent target.
That comes at little comparative cost in terms of higher joblessness, with the unemployment rate seen rising from the current 3.7 per cent to 4.1 per cent, the same rate projected in September, while economic growth is seen slowing from an estimated 2.6 per cent this year to 1.4 per cent over 2024.
While officials remain free to raise the Fed’s benchmark overnight interest rate again in coming months if inflation resurges, that seems increasingly unlikely given the recent performance of inflation that has edged steadily towards the central bank’s target.
The economic projections, as a whole, cling closely to the “soft landing” scenario that has become the base case for US central bankers hoping that inflation continues to slow without a recession and sharp rise in unemployment.
Investors ahead of this week’s meeting bet that the Fed would cut its policy rate by a full percentage point by the end of next year, putting the central bank’s new projections nearly in line with the views of financial markets.
After raising the policy rate by 5.25 percentage points since March of 2022 in one of the swiftest Fed reactions to rising price pressures, the central bank has now kept the policy rate on hold since July as inflation edges closer to its target.
