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BNY Mellon Wealth Management head of equities Alicia Levine and Simplify Asset Management chief strategist Mike Green discuss whether the Fed’s inflation strategy is working on ‘Making Money.’
The Federal Reserve on Wednesday held interest rates steady for the third straight time, signaling that its nearly two-year battle against high inflation may finally be coming to an end as policymakers forecast a series of cuts in 2024.
The widely expected decision left interest rates unchanged at a range of 5.25% to 5.5%, the highest level in 22 years. But policymakers also opened the door to multiple rate cuts next year amid signs the economy is beginning to slow in the face of tighter monetary policy.
New quarterly economic projections laid out after the meeting show that a majority of Fed officials who participated in the meeting expect rates to fall to 4.6% by the end of 2024, suggesting there will be at least three quarter-point rate cuts next year. Policymakers also penciled in additional rate cuts in 2025 and 2026.
No officials see rates rising further next year.
In a statement released after the meeting, the policy-setting Federal Open Market Committee acknowledged that “inflation has eased over the past year but remains elevated” and said they would watch the economy to see if “any” additional rate hikes are needed – a change that indicates many officials believe further tightening is not necessary at this point.
FED’S FIGHT AGAINST INFLATION IS WEIGHING ON MIDDLE-CLASS AMERICANS
Jerome Powell, chairman of the Federal Reserve, speaks during a news conference following a Federal Open Market Committee meeting in Washington, D.C., on March 22, 2023. (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)
“We added the word ‘any’ as an acknowledgment that we are likely at, or near, the peak rate for this cycle,” Chair Jerome Powell told reporters at the post-meeting press conference in Washington. “But participants also didn’t want to take the possibility of further hikes off the table.”
US ECONOMY ADDS 199,000 JOBS IN NOVEMBER, UNEMPLOYMENT RATE UNEXPECTEDLY FALLS
The move marks a dramatic shift in how the Fed has approached policy this year, shifting from a higher-for-longer to a higher-for-shorter stance. The long-awaited pivot brings to an end an aggressive tightening campaign that saw policymakers raise interest rates 11 times since March 2022 in the hopes of crushing inflation and cooling the economy.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| I:DJI | DOW JONES AVERAGES | 37090.24 | +512.30 | +1.40% |
| I:COMP | NASDAQ COMPOSITE INDEX | 14733.96386 | +200.57 | +1.38% |
| SP500 | S&P 500 | 4707.09 | +63.39 | +1.37% |
Traders celebrated the prospect of lower rates, with stocks surging and bond yields falling after the decision. The Dow Jones Industrial Average topped 37,000 for the first time ever.
Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s. While inflation has cooled considerably in recent months, it remains up 3% compared with the same time a year ago, according to the most recent Labor Department data. Even with the recent declines, Americans continue to pay more for a number of necessities including food, medical care and rent.
Yet the rapid rise in rates has not stopped consumers from spending or businesses from hiring.
The labor market is continuing to chug along at a healthy pace, with employers adding 199,000 new workers in November. Job openings remain high and the unemployment rate recently fell to 3.7% from 3.9%.
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The fresh forecasts laid out Wednesday illustrate that most central bankers anticipate the jobless rate will tick slightly higher to 4.1%, the same as the September estimate. They also show that inflation will cool to 2.4% next year – lower than the 2.5% forecast in September – before falling to 2.1% in 2025.
“The major takeaway from the December policy meeting is that the Federal Reserve is forecasting a soft landing, full employment and intends to reduce its federal funds policy rate by at least 75 basis points in 2024 to support the ongoing business expansions,” said Joe Brusuelas, RSM chief economist.
“And from our vantage point that is about the best holiday gift a central banker can bestow upon the investment community, policymakers, and the public.”
