The Federal Reserve left interest rates unchanged in the 5.25% – 5.5% range for the third time at its December 13 meeting…while also signaling three cuts through 2024. In particular, with inflation easing and economy showing exceptional resilience, policymakers at the Federal Open Market Committee (FOMC) voted unanimously to keep the lending rate between 5.25%-5.5%. Along with the decision to keep interest rates unchanged, Committee members “estimated” at least three rate cuts in 2024 of 0.25% (cumulative 0.75%).
If anything, these are cuts that exceed expectations, after the most aggressive tightening cycle in 22 years. However, there is still uncertainty about how ambitious the FOMC’s monetary easing plan can be, given that US policymakers are heavily dependent on data.
Dot plot and QT
As for the Commission’s dot plot, which reveals the expectations of individual members, as predicted it shows at least 3 reductions in 2024 (0.75%) and another four reductions in 2025 (by 1%). Three more cuts will take place in 2026, bringing the Fed Funds rate to a range of 2%-2.25%, close to the long-term outlook – although there was considerable variation in estimates over the past two years.
It’s worth noting that in the last update the committee had indicated only one cut in 2023. The statement said the committee would take into account many factors for “any” further policy tightening – a word that had not appeared before. In addition to interest rate hikes, the Fed has been allowing up to $95 billion in bonds to be taken off its balance sheet each month. This process continues, and there has been no indication that the Fed is willing to scale back its quantitative easing (QT) policy.
The Economy
At the macroeconomic level, inflation is forecast to ease to 2.8% at the end of 2023 and slip further to 2.4% in 2024, very close to the 2% target. Meanwhile, unemployment is expected to rise from 3.7% to 4.1%, while the growth rate is forecast to slow to 1.4% from the current 2.6%. If the forecasts are confirmed, the Fed will have succeeded in reducing inflation without driving the economy into recession and causing a large rise in the unemployment rate, achieving a so-called “soft landing.” It is noted that economic data published this week showed that both consumer prices and producer prices showed little change in November.
Trust Economics estimations show that the Fed’s preferred inflation rate will be around 3.1% annualized in November and could actually reach 2% in 2024, meeting the central bank’s target.
Jerome Powell (Fed Chairman): Economic growth has “slowed significantly” in Q4 2023
The US economy has slowed significantly in the fourth quarter of 2023, US central bank chairman Jerome Powell noted in his post-Fed meeting speech on the further course of monetary policy.
In particular, Powell said the central bank sees the US economy losing momentum in the final months of the year.
“Recent indicators suggest that growth in economic activity has slowed significantly from the excessive pace seen in the third quarter. Even so, GDP will grow by around 2.5% for the year as a whole,” he said, adding: “Housing activity has leveled off after picking up in the summer, while data suggests higher interest rates are slowing business investment ».
The Fed chairman said inflation has eased – although it remains elevated. He admitted that the central bank’s efforts to reduce inflation were beginning to have an effect – although he reiterated that much still needed to be done. “Inflation has come down from its highs and this has come without a significant rise in unemployment. This is very good,” Powell said. “But inflation is still very high. Its continued progress and decline is not assured. And the way forward is uncertain,” he concluded.
