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Fed's December Meeting
News from the FOMC policy statement, interest-rate decision, summary of economic projections, and Jerome Powell's presser.
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Dec. 14, 2023 at 3:57 AM EST
Fed Holds Rates Steady, Signals 3 Rate Cuts in 2024
The Federal Reserve kept interest rates unchanged at the conclusion of today's policy meeting. The decision, which was widely expected, keeps the target range for the federal-funds rate at 5.25-5.50%.
Officials see the central bank keeping monetary policy tighter next year than Wall Street had expected. The median forecast in Federal Open Market Committee members’ latest Summary of Economic Projections has the federal-funds rate ending 2024 at 4.6%. Investors expected significantly more cuts in 2024.
Further hiking appears to be off the table, however. Minor changes to the wording of the Fed’s closely watched policy statement signaled the shift and Chair Jerome Powell said officials "believe that our policy rate is likely at or near its peak for this tightening cycle."
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Investors are penciling in even more cuts to interest rates following the latest news on monetary policy from the Federal Reserve.
Federal Open Market Committee members updated their projections for future interest rates on Wednesday. Officials’ median estimate now calls for the federal-funds rate to end 2024 at 4.6%—implying three quarter-point cuts from the committee’s current target range of 5.25% to 5.50%. That compared with futures-market pricing before the meeting that pointed to a target rate of around 4.00% to 4.25% at the end of 2024, which would mean four or five quarter-point cuts.
Markets took an even more dovish message from the committee’s statement announcing the decision, its economic projections, and a press conference from Federal Reserve Chair Jerome Powell. The greatest odds implied by futures pricing on Wednesday afternoon were for a year-end 2024 fed-funds rate in the range of 3.75% to 4.00%. That would mean 1.5 percentage points of reductions in the Fed’s target next year, or six cuts of a quarter-point each.
It would likely take faster-than-expected progress on returning inflation to the Fed’s 2% target, or a more severe economic downturn in 2024, to get that kind of easing of monetary policy.
While Federal Reserve officials expect their preferred inflation gauge will be at 2.4% at the end of next year, still above the bank’s target of 2%, policy makers will start cutting rates well before it hits that goal, Chair Jerome Powell said Wednesday.
“The reason you wouldn't wait to get to 2% to cut rates is that would be too late,” he said. “You don't overshoot.”
That’s because, Powell explained, it takes a while for monetary policy to affect the economy and reduce inflation.
He declined to provide a specific inflation point at which the Fed will feel comfortable to start cutting rates. “I wouldn't want to identify any one precise point because I would be able to look back then and probably find out that it turned out not to be right,” he said, adding that Fed officials will be looking at a “broad collection of factors” to determine when to cut rates.
The bank tracks the core personal expenditures price index, which excludes the volatile prices of food and energy, in assessing whether inflation is too high or too low.
The U.S. economy has been surprisingly robust in the wake of the Covid-19 pandemic, but many indicators are now showing growth in real gross domestic product is moderating.
But what happens if growth surprises next year, as it did in 2023, with growth of 5.2% in the third quarter. Does above-trend growth spell trouble in itself?
Federal Reserve Chair Jerome Powell said Wednesday that while strong real GDP growth itself isn’t problematic, it could make it more difficult for the central bank to achieve its 2% inflation target.
If the U.S. experiences robust economic growth, that will probably keep the labor market very strong. And it is likely that it would put some upward pressure on inflation, Powell noted.
“That could mean that it takes longer to get to 2% inflation,” he said. “That could mean we need to keep rates higher for longer. It could even mean ultimately that we would need to hike again.”
“We're moving carefully at this point,”Powell added, saying that while the bank is making strides in tamping down inflation, it isn’t quite enough.
“We’re pleased with the progress and we see the need for further progress,” Powell said. “I’m not calling into question the progress, it’s great. We just need to see more. We need to see further progress toward getting back to 2%. It’s our job to restore price stability.”