The Federal Reserve on Wednesday kept its key interest rate stable for the third straight day, setting the table for multiple rate cuts in 2024 and beyond.

With inflation easing and the economy recovering, policymakers on the Federal Open Market Committee voted unanimously to keep the benchmark federal funds rate within a targeted range of between 5.25% and 5.5%.

Along with the decision to stay on hold, committee members planned at least three rate cuts in 2024, with increases of a quarter of a percentage point expected each. That’s less than the market price of four, but more aggressive than what officials had previously indicated.

Markets had largely expected the decision to hold, which could end a cycle that saw 11 rate hikes and pushed the key interest rate to its highest level in more than 22 years. However, there was uncertainty about how ambitious the FOMC would be in easing monetary policy. After the decision was published, the Dow Jones Industrial Average rose more than 400 points and exceeded 37,000 for the first time.

The committee’s “dot plot” of individual members’ expectations suggests an additional four cuts in 2025, or a full percentage point. Three more cuts in 2026 would bring the key rate down to 2% to 2.25%, roughly in line with the long-term forecast, although there has been significant variation in estimates for the past two years.

However, following Chairman Jerome Powell’s meeting and press conference, markets priced in an even more aggressive rate-cutting path, expecting cuts of 1.5 percentage points next year, double the pace indicated by the FOMC.

In a possible hint that the rate hikes are over, the statement said the committee would consider several factors for “any” further tightening of monetary policy – a word that had not been used before.

“While the weather is still cold outside, the Fed has hinted at a possible thawing of frozen high interest rates in the next few months,” said Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

Along with the rate hikes, the Fed has allowed up to $95 billion a month in maturing bond proceeds to flow off its balance sheet. This process has continued and there is no sign that the Fed is ready to limit this part of the monetary tightening.

Inflation “has eased over the past year”

The developments come against the backdrop of an improvement in inflation, which reached a 40-year high in mid-2022.

“Inflation has fallen from its highs, without a significant increase in unemployment. This is very good news,” Chairman Jerome Powell said during a press conference.

This reflected the new wording in the post-meeting statement. The committee added the caveat that inflation had “eased over the past year,” but maintained its description of prices as “elevated.” Fed officials expect core inflation to fall to 3.2% in 2023 and 2.4% in 2024 and then to 2.2% in 2025. The target of 2% will finally be reached again in 2026.

Economic data released this week showed that both consumer and wholesale prices were little changed in November. In some respects, however, the Fed is moving closer to its 2% inflation target. Bank of America’s calculations suggest the Fed’s preferred inflation rate will be around 3.1% year-on-year in November and could actually reach an annual rate of 2% for the next six months, in line with the central bank’s target .

The statement also noted that the economy had “slowed” after saying in November that activity had “grown strongly.”

In the press conference, Powell said: “Recent indicators suggest that economic growth has slowed significantly from the outsized pace of the third quarter. Still, GDP is on track to grow by around 2.5% for the full year.”

Committee members estimated gross domestic product at 2.6% annual growth in 2023, up half a percentage point from the last update in September. Officials expect GDP to be 1.4% in 2024, roughly unchanged from the previous forecast. Unemployment rate forecasts remained largely unchanged, reaching 3.8% in 2023 and rising to 4.1% in subsequent years.

Officials have stressed their willingness to raise interest rates again if inflation rises. However, most have said they can now be patient as they watch what impact previous monetary tightening measures have on the U.S. economy.

The stubbornly high prices have taken a political toll on President Joe Biden, whose approval rating has suffered largely because of negative sentiment over his handling of the economy. There has been some speculation that the Fed may shy away from dramatic policy action in the presidential election year, which looms in 2024.

However, because real interest rates, or the difference between the federal funds rate and inflation, are high, the Fed would be more likely to act if inflation data continues to cooperate.

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