The US Federal Reserve opted to keep interest rates steady and indicated a shift in its monetary policy, signaling the end of the historic tightening implemented over the past two years. The decision was accompanied by new economic projections, highlighting the expectation of lower borrowing costs in 2024.
- Policy Statement: The Federal Reserve held interest rates unchanged and issued a new policy statement acknowledging that inflation “has eased over the past year.” The central bank expressed its intention to monitor the economy to assess the necessity of any additional rate hikes, suggesting a departure from the previous inclination towards tightening.
- Projections for 2024: A significant majority of Fed officials, 17 out of 19, projected that the policy rate would be lower by the end of 2024 compared to the current range of 5.25 to 5.50 percent. The median projection anticipated a decrease of three-quarters of a percentage point. Importantly, none of the officials foresaw rates being higher by the end of the next year.
- Powell’s Statement: In a press conference following the policy meeting, Fed Chair Jerome Powell emphasized the uncertainty in the economic outlook. While expressing the belief that the policy rate is at or near its peak for the tightening cycle, Powell acknowledged the unpredictability of the economy. He stated that while it might not be viewed as likely to raise interest rates further, the possibility is not definitively ruled out.
- Market Reaction: US stocks experienced a positive response, rising after the release of the statement and projections. Simultaneously, the US dollar weakened against a basket of currencies, and US Treasury yields declined. Market analysts noted a slightly more dovish tone than expected.
- Inflation and Employment: The updated projections indicated that policymakers see a better balance in the risks to inflation and employment, both crucial components of the Fed’s dual mandate. The overall economic projections aligned closely with the concept of a “soft landing,” hoping for a gradual slowdown in inflation without triggering a recession or significant unemployment rise.
- Inflation Outlook: Headline personal consumption expenditures inflation is expected to end 2023 at 2.8%, with a further decline to 2.4% by the end of the following year. This projection brings inflation within proximity of the Fed’s 2% target. The unemployment rate is projected to rise from the current 3.7% to 4.1%, maintaining the same rate as projected in September. Economic growth is expected to slow from an estimated 2.6% this year to 1.4% in 2024.
- Market Expectations: Investors anticipated a dovish stance, with expectations that the Fed might cut its policy rate by a full percentage point by the end of the next year. The central bank’s projections align closely with market sentiments.
- Policy Adjustment: After implementing a rapid increase of 5.25 percentage points in the policy rate since March 2022, the Federal Reserve has maintained a hold on the rate since July. The recent decision reflects a nuanced approach as inflation approaches the central bank’s target.
The Federal Reserve’s decision and the accompanying projections represent a notable shift in tone and outlook, signaling a potentially softer stance in response to evolving economic conditions. The focus remains on achieving a balanced economic scenario with controlled inflation and sustainable growth.