The Federal Reserve kept interest rates steady on Wednesday for the third straight meeting, and signaled deeper cuts for next year as inflation is expected to cool faster than initially anticipated.
The Federal Open Market Committee, or FOMC, kept its benchmark rate at a more than two-decade high range of 5.25% to 5.50%.
Fed sees deeper cuts amid progress on inflation
The Fed removed its forecast for an additional hike this year, projecting that rates have now peaked at 5.4%, and tacked on a further rate cut for next year.
Fed members estimated that the benchmark rate will fall to 4.6% next year, suggesting three rate cuts in 2024, from a prior projection of 5.1%, or two rate cuts. For 2025, Fed members now expects the central bank to lower rates to 3.6% from 3.9% previously.
The move to forecast a step up in the number of rate cuts for next year was supported by projections that inflation will fall at a quicker pace than previously anticipated.
Soft landing within reach as inflation to slow faster than expected, labor market to remain largely intact
The Fed sees core PCE, which excludes food and fuel costs and is considered a better gauge of underlying inflation, at 3.2% this year, from a prior estimate of 3.7%. Inflation is expected to fall further next year to a 2.4% pace, down from a prior forecast of 2.6%. In 2025, price growth is seen at 2.2%, below a previous estimate of 2.3%.
In the press conference following the gathering, Federal Reserve Chairman Jerome Powell cautioned that it was too early to say that the central bank had achieved its goal of taming elevated inflation.
“No one is declaring victory. That would be premature, and we can’t be guaranteed in this progress,” Powell said.
The Fed’s outlook on the labor market was largely unchanged from the September meeting, while the unemployment rate was forecast to rise to 4.1% next year and remain at that rate in 2025.
The backdrop of expectations of a cooling inflation picture and resilient labor market stoked optimism that the Fed may be able to engineer a so-called “soft landing.” In this scenario, inflation is defeated without causing a broader economic collapse or a spike in unemployment.
The growth outlook for this year was increased to 2.6% from 2.1% previously. However, gross domestic product (GDP) is expected to fall to 1.4% in 2024 before picking up the pace to 1.8% in 2025.
The Powell pushback that many expected, but never arrived
Ahead of the meeting, Powell was expected to push back against aggressive expectations for four cuts for next year as it was only just two weeks ago that he warned it was “premature” to speculate on when the Fed may cut rates.
But the Fed chief didn’t deliver the push back that many were expecting, stoking fresh optimism that rate cuts will get underway as soon as March.
About 60% of traders expect the Fed to cut as soon as March, compared with about 40% a day earlier, according Investing.com’s Fed Rate Monitor Tool.
“Powell had the opportunity to push back on the market pricing [for aggressive rate cuts next year] .. but he didn’t do anything to push back, which is very dovish,” Zhiwei Ren, a portfolio manager at Mutual Asset Management, told Investing.com’s Yasin Ebrahim in an interview Wednesday.
With about 144 basis points cuts now being priced in for next year, Treasury yields fell sharply. The yield on the 10-year Treasury fell to an August low, sending stocks sharply higher, with the Dow Jones Industrial Average notching a record high.