Economic Battle Against Inflation Nearing End
The Federal Reserve has decided to keep interest rates unchanged for the third consecutive time, indicating that the years-long fight against high inflation may finally be reaching its conclusion. The decision, widely anticipated by economists, maintains interest rates at a range of 5.25% to 5.5%, the highest level seen in over two decades. However, policymakers have also signaled the possibility of multiple rate cuts in the coming year as the economy shows signs of slowing under tighter monetary policy.
Forecasts Point to Rate Reductions in 2024
Newly released quarterly economic projections reveal that a majority of Fed officials anticipate interest rates dropping to 4.6% by the end of 2024. This suggests that at least three quarter-point rate cuts can be expected in the next year. Additionally, policymakers have indicated the potential for further rate reductions in 2025 and 2026. Notably, no officials foresee rates rising in the upcoming year. The prospect of lower rates has been met with enthusiasm among traders, leading to a surge in stocks and a decline in bond yields. The Dow Jones Industrial Average, for instance, reached a record-breaking 37,000 points for the first time ever.
Inflation Eases, Further Tightening Unlikely
In a statement following the meeting, the Federal Open Market Committee acknowledged that while inflation has eased over the past year, it remains at elevated levels. However, the committee stated that it will closely monitor the economy to determine if any additional rate hikes are necessary. Fed Chair Jerome Powell explained that the inclusion of the word “any” in the statement signifies the belief that the current interest rate may be at or near its peak for this cycle. Nonetheless, participants did not want to rule out the possibility of future hikes altogether.
Shift in Fed Policy
This decision marks a significant shift in the Federal Reserve’s approach to monetary policy. Throughout this year, the Fed has transitioned from a “higher-for-longer” stance to a “higher-for-shorter” stance. This change culminates a rigorous tightening campaign that involved increasing interest rates 11 times since March 2022, with the aim of curbing inflation and cooling down the economy. The impact of rate hikes can be seen in the higher rates on consumer and business loans, causing employers to cut back on spending. The average rate on 30-year mortgages, for example, has risen above 8% for the first time in decades. Borrowing costs for various necessities such as home equity lines of credit, auto loans, and credit cards have also experienced significant increases.
Affected Sectors and Economic Indicators
Despite the rapid rise in rates, consumer spending and business hiring have remained robust. The labor market continues to perform well, with 199,000 new jobs added in November. Job openings remain high, and the unemployment rate has recently fallen to 3.7%. Forecasts released by the Federal Reserve show that most central bankers anticipate a slight increase in the jobless rate to 4.1% but expect inflation to cool to 2.4% next year, lower than the September forecast of 2.5%. Inflation is projected to further decline to 2.1% in 2025.
A Positive Outlook
Economists view the December policy meeting as a signal of a “soft landing” and full employment. The Federal Reserve’s intention to decrease the federal funds policy rate by at least 75 basis points in 2024 is perceived as supportive of ongoing business expansions. Chief economist Joe Brusuelas of RSM expressed positivity, stating that this outlook is the best holiday gift that central bankers can offer to the investment community, policymakers, and the public.