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Relief in Sight: Fed Paves Way for Cheaper Borrowing with Projected Rate Cuts
Federal Reserve’s Strategic Move: A Delicate Balance
Overview
The much-anticipated move by the Federal Reserve was somewhat less aggressive than market expectations but surpassed the central bank’s previous indications. This marks a crucial shift following 11 consecutive interest rate hikes since March 2022.
Economic Assessment
Chairman Jerome Powell acknowledged a slowdown in the economy from the robust third-quarter pace. Despite inflation easing, it remains elevated. The focus now shifts to the Fed’s retreat from what it deems “restrictive” monetary policy.
Powell’s Fine Line:In his post-decision remarks, Chairman Jerome Powell delicately balanced celebrating victory in the war on inflation while keeping the option of future rate hikes open.
Rate Cut Speculations
Markets currently indicate even odds for rate cuts beginning by May, with ongoing debates on whether cuts are driven by a weakening economy or consistent progress toward the Fed’s 2% annual inflation target.
Powell’s Ambiguity:Powell refrained from specifying when cuts could begin but hinted that it’s a topic of discussion and is gradually coming into view.
Fed’s Projections
The Fed’s projection of three rate cuts for the upcoming year is slightly lower than market expectations but more than previously suggested. The “dot plot” indicates additional cuts in 2025 and 2026, with longer-range projections showing some uncertainty.
Economic Outlook Changes:Updated economic projections reflect a lower annual inflation rate and adjusted GDP growth for 2023 and 2024.
Inflation Front
Encouraging news on the inflation front emerged as the producer price index remained unchanged for November, running at a 0.9% annual pace. This follows a recent consumer price index report indicating slowing inflation.
Policy Recalibration:Economist Gregory Daco suggests that if sustained, lower inflation and inflation expectations will favor policy recalibration in 2024, anticipating 100bps of rate cuts next year.
Market Reaction
Markets surged in response to the Fed’s statement, with the Dow Jones Industrial Average rising by 200 points. The belief that the Fed has concluded its rate hikes for this economic cycle has driven recent rallies in both stock and bond markets.
Market Expectations:Curt Long, chief economist at the National Association of Federal Credit Unions, notes that updated economic projections align with market beliefs, expecting multiple rate cuts in 2024.
Powell’s Perspective
During the press conference, Powell expressed his belief in the possibility of tighter monetary policy without negatively impacting the labor market. He emphasized the unpredictability of the economy in the three and a half years since the COVID-19 pandemic began.
Economic Uncertainty
Powell acknowledged the potential for a recession but highlighted that there’s little basis for thinking the economy is currently in one.