Fed Holds Rates Steady At Final Meeting of A Very Unexpected Year

WASHINGTON, DC - JUNE 17: Federal Reserve Chairman Jerome Powell waits to deliver remarks
Photo by Kevin Dietsch/Getty Images

The Federal Reserve left its benchmark interest rate target unchanged at the 22-year high where it has sat since the Fed stopped hiking rates in July of this year—and officials indicated they are open to more rate cuts next year than indicated earlier.

At the end of the December meeting of the Fed’s monetary policy panel, the Federal Open Market Committee, officials said they were leaving the federal funds target range at 5.25 percent to 5.50 percent. The decision was unanimous.

After the November meeting, Fed chairman Jerome Powell strongly hinted that the Fed’s rate hikes, which raised the benchmark from a range of zero to 0.25 percent starting in March of 2022, may have come to an end but insisted that officials were not yet talking about when rate cuts might become appropriate.

Along with the rates announcement, the Fed released a new summary of the economic projections of participants in the FOMC meeting. This showed the the median projection of Fed officials is for the fed funds rate to be cut to around 4.6 percent by the end of next year.

In September, the last time the Federal Reserve released the summary of the economic projections, the median projection was for one more hike this year.

The median forecast in the September projections was for the fed funds rate to be 5.10 percent at the end of 2024, one quarter of a point or so below where it is now and a half a point—or two rate 25 basis point rate cuts—below the median projection for the end of 2023. A basis point is one-hundredth of a percentage point.

The new projections imply around three cuts next year from the current interest rate target.

In recent weeks, however, several officials have spoken as though they could foresee multiple rate cuts coming next year. Financial markets have pushed ahead of Fed projections and see the fed funds rate falling to a range of 4.00 to 4.25 percent by the end of next year—or possibly even lower. That is the equivalent of five quarter point cuts next year.

Wednesday’s Fed decision comes at a volatile time for financial markets. Yields on bonds have whipsawed in the last two months as the market digested inflation and employment data and changing views about the likely path of Fed policy next year. The yield on the 10-year Treasury rose above five percent in October and then plunged. Prior to the Fed’s announcement on Wednesday, it was around 4.16 percent, the lowest since around August.

Several Fed officials have said they welcome higher yields, which typically represent a tightening of financial conditions. Fed officials believe that tighter financial conditions are the key to taming inflation by reducing demand, especially for labor. Higher yields were “doing the Fed’s job” by tightening conditions, in the jargon of Wall Street. Some analysts said the October surge in yields was the equivalent of one or two Fed hikes, essentially making the hike officials had foreseen at the September meeting unnecessary.

This view that the Fed would no longer hike and might start cutting rates earlier than thought—perhaps as early as March—pushed down bond yields, leading to looser financial conditions. The Fed’s decision to hold interest rates steady appears to indicate that officials did not regard this loosening as overly threatening to the downward trend in inflation.

The economy has defied expectations of Fed officials and many economists this year. At their year-end meeting in 2022, Fed officials projected the economy would grow just 0.5 percent this year and the unemployment rate would rise to 4.6 percent. The final quarter for the year is still underway but it is already clear that full-year growth will likely be above 2.5 percent. The unemployment rate fell to 3.7 percent in November.

The Fed was closer when it projected a year ago that the annual gain in the personal consumption price index, which it uses in its two percent target for inflation, would fall from 6.5 percent last year to 3.5 percent this year. It fell to 3.0 percent in October from 3.4 percent in the prior three months but many economists expect it to increase in the final two months of the year. Bank of America recently forecast the index would end the year with a 3.8 percent increase.


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