In addition to keeping interest rates unchanged in December, the Federal Reserve is forecasting up to three rate cuts in 2024.
The Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate between 5.25% and 5.50% at its last policy meeting in December, bringing to a close a year that saw four 25-basis-point increases and three rate pauses.
“Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings,” said Federal Reserve chairman Jerome Powell. “Given how far we have come, along with the uncertainties and risks that we face, the Committee is proceeding carefully.”
In its official policy statement, the FOMC wrote, “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The FOMC’s use of ‘any’ in December’s policy statement, which was a new addition, suggests that the Fed has likely reached the peak of its tightening cycle. However, despite the likelihood of rate cuts in 2024, Powell says a possible recession is not off the table.
“As we approach the end of the year, it is natural to look back on the progress that has been made… Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain,” said Powell.
“As we look ahead to next year, I want to assure the American people that we are fully committed to returning inflation to our 2% goal,” Powell added.
Along with holding rates steady, the 12-member FOMC, which decides the direction of U.S. monetary policy, also released an updated Dot Plot, or Summary of Economic Projects (SEP).
According to the SEP, Fed participants have penciled in 75 basis points of rate cuts by the end of 2024. If policymakers follow this path, which points to the first rate cut in March, the Fed’s benchmark rate would fall from its current range of 5.25%-5.50% to a range of 4.50%-4.75% by the end of next year.
For reference, this would bring the benchmark rate in line with the range from February 2023.
“While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table,” said Powell.
“If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% at the end of 2026, still above the median longer-term rate,” Powell detailed.
While the markets celebrated the news, some saw the news as a worrying sign for inflation.
The FOMC likely made a big mistake by not pushing back on the idea of cuts in 2024, according to Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co.
“Today’s statement was Powell’s golden chance to press back on the markets’ undermining of his policy,” said Conger, per CNBC. “Instead, they used the occasion to congratulate themselves on a mission accomplished. I fear history will not be kind to this FOMC.”
