The US Fed keeps the policy rate in a range of 5.25%-5.50% and sees a cut of 75 basis points next year
The Federal Reserve held interest rates steady on Wednesday and signaled in new economic projections that the historic tightening of U.S. monetary policy over the past two years has come to an end and lower borrowing costs will come in 2024.
In a new policy statement, US central bank officials explicitly took into account that inflation “has declined over the past year” and said they would monitor the economy to see if “any” additional rate hikes are needed – which directly implies that: after months of aggressive tightening and a tendency to push rates higher, they may not need to go higher again.
Nearly unanimously, 17 of 19 Fed officials predict that the policy rate will be lower at the end of 2024 than it is today — with the median projection showing rates falling by three-quarters of a percentage point from the current 5.25 percent. Range of 5.50 percent. No officials expect rates to be higher by the end of next year.
For an institution reluctant to declare victory over inflation, which hit a 40-year high last year, the updated projections and new statement mark a notable shift in tone and outlook.
Headline personal consumption expenditure inflation is expected to reach 2.8 percent at the end of 2023, falling further to 2.4 percent by the end of next year, within reasonable distance of the Fed's 2 percent target. That comes at relatively little cost in terms of higher unemployment, with the unemployment rate rising from the current 3.7 percent to 4.1 percent, the same rate forecast in September, while economic growth slows from an estimated 2 .6 percent this year. to 1.4 percent compared to 2024.
While officials remain free to raise the Fed's interest rate again in the coming months if inflation picks up again, that seems increasingly unlikely given recent inflation trends that have moved steadily toward the central bank's target.
The economic projections as a whole remain closely aligned with the 'soft landing' scenario that has become the base case for the US
central bankers hope inflation continues to slow without a recession and a sharp rise in unemployment.
Investors were betting ahead of this week's meeting that the Fed would cut its policy rate by a full percentage point by the end of next year, bringing the central bank's new projections nearly in line with financial markets' views.
Fed Chairman Jerome Powell is expected to hold a news conference at 2:30 PM EST (1930 GMT) to explain the meeting.
After raising the policy rate by 5.25 percentage points since March 2022 in one of the Fed's fastest responses to rising inflation, the central bank has now left the policy rate unchanged since July as inflation moves closer to its target.