Updated Dec 13, 2023 - Economy

Fed leaves interest rates unchanged, signals cuts ahead next year

The Federal Reserve building

The Federal Reserve building under renovation in Washington. Photo: Valerie Plesch/Bloomberg via Getty Images

The Federal Reserve left interest rates unchanged at its final policy meeting of 2023, while signaling that 2024 could bring significant rate cuts.

Why it matters: The decision to leave rates unchanged in a 5.25% to 5.5% range for the third consecutive meeting. Officials indicated that the central bank is likely done with its historic rate-hiking campaign to tame inflation that has, so far, resulted in little damage to the economy.

  • Officials have not ruled out raising rates again, but a tweak in its policy statement suggested rate hikes are done.
  • During a press conference, Fed chair Jerome Powell also suggested as much, saying, "While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters."
  • Rate hikes "are not the base case anymore as it was 60, 90 days ago," Powell said.

What's new: Most top Fed officials envision cutting rates three or more times in 2024, according to new forecasts released Wednesday. The median projection was that in December of next year, the Fed's target rate will be 4.6%, 0.75 percentage points lower than now.

  • The median official envisions cutting rates by another full percentage point to 3.6% by year-end 2025.

What they're saying: "Inflation has eased over the past year," the Federal Open Market Committee said, in new language that acknowledges fading price pressures.

  • The statement continued on to repeat language noting that inflation "remains elevated," however.

The context: It comes as analysts and financial markets have increasingly prepared for the possibility of rate cuts early in 2024, which Powell pushed back on in a speech earlier this month.

  • But at a press conference on Wednesday, Powell's tone shifted. The Fed chair said there has been "real progress on inflation," while the labor market has come more into balance.
  • "These are the things we've been wanting to see," Powell said. The natural next question, Powell said, is "when it will become appropriate to begin dialing back the amount of policy restraint that's in place."

Of note: Stocks jumped on the news of the prospective rate cuts next year. The S&P 500 rose by more than 1% and reached the highest level of the year.

  • Meanwhile, bond yields dove lower: the 10-year bond yield fell by 16 basis points to 4.03% — continuing a sharp reversal after hitting 5% in late October.

Flashback: At its September meeting, the last time the Fed published formal forecasts, 12 of 19 top officials anticipated raising interest rates one more time this year. They elected not to do so in response to lower-than-expected inflation readings.

  • In September, the median official anticipated inflation of 3.3% this year. Now, that forecast has shifted down to 2.8%, not far from the 2% inflation the Fed targets.
  • The median forecast was for a 5.1% policy rate at the end of 2024, not the 4.6% that now represents the consensus view.

Between the lines: The new policy statement lists factors that the committee will use in determining "the extent of any additional policy firming."

  • That is a subtle but significant tweak from past language about determining "the extent of additional policy firming."
  • In other words, further rate hikes were discussed as if they were a forgone conclusion at the Nov. 1 policy meeting, but now are spoken of as only a possibility.

By the numbers: Fed officials remained relatively optimistic about the prospects for the economy. The median policymaker now sees a 4.1% unemployment rate at the end of next year, unchanged from September.

  • They also revised up their 2023 growth forecast, now seeing a 2.6% rise in GDP, versus 2.1% envisioned in September.
  • "Inflation has eased from its highs, and this has come without a significant increase in unemployment. That's very good news," Powell said at a press conference. But he warned that "the path forward is uncertain."
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