Federal Reserve leaves rates unchanged, announces three cuts next year


Federal Reserve officials left interest rates unchanged in their final 2023 policy decision and predict they will reduce borrowing costs three times in the coming year, a sign that the central bank is moving into the next phase in its fight against rapid inflation.

Interest rates are set in a range of 5.25 to 5.5 percent, where they have been Since July. After making a rapid series of increases that began in March 2022 and pushed borrowing costs to their highest level in 22 years starting this summer, officials have held policy steady for three straight meetings.

That patient stance has given policymakers time to assess whether interest rates are high enough to weigh on the economy and ensure inflation slows to the Fed's 2 percent target over time. , and increasingly, the slowdown in inflation and the cooling of the labor market have convinced them that policies are in a good place. Jerome H. Powell, chairman of the Federal Reserve, said during his news conference Wednesday that officials no longer expected to raise interest rates again.

In fact, Fed policymakers projected Wednesday that they would reduce borrowing costs to 4.6 percent by the end of 2024, markedly below their previous estimate of 5.1 percent, which was released in September. The forecast implies that officials will make three quarter-point rate cuts next year.

Markets cheered as Fed policymakers painted an optimistic vision of a future with lower rates. The S&P 500 index soared after the Federal Reserve's policy decision and continued to rise as Powell spoke, yields on key government bonds fell and Investors are betting more and more. that the Federal Reserve could cut rates as early as March.

Powell avoided declaring victory over inflation and avoided commenting on when rate cuts might begin or what criteria would justify them. Still, he struck a cheerful tone during his news conference, celebrating recent gains on inflation and expressing cautious hope that it can continue to slow without causing serious economic damage.

“Inflation has come down from its peaks, and this has come without a significant rise in unemployment; that's very good news,” Powell said, even as he emphasized that “the path forward is uncertain.”

Inflation has surprised officials before by accelerating again after slowing, and officials made clear Wednesday that they could still raise rates if prices rose unexpectedly.

“Participants did not see additional increases,” Powell said. “Participants also did not want to rule out the possibility of further increases.”

But even with that caveat, the overall message was that “they feel much better about setting policy and are charting a course to cut rates next year,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. He said he thought the Federal Reserve could move toward defining what would justify rate cuts as early as January.

The call to lower rates was widespread, building on Wednesday's announcement: Not a single Federal Reserve official expected interest rates to be higher by the end of next year.

That shift in outlook has come as the U.S. economy makes significant and long-awaited progress toward slower price increases.

Americans have been dealing with rapid inflation since prices began rising rapidly in early 2021. Initially, costs rose as global prices tangled supply chains and shortages arose of products such as cars and furniture. Inflation was then exacerbated by a burst fuel and food costs following the Russian invasion of Ukraine in 2022.

Those big shocks collided with strong demand: Households had saved a lot of money during the pandemic, in part because they received government relief payments. Because they spent eagerly, companies had the means to raise prices without scaring away customers. Companies themselves began paying more as they tried to attract workers to a strong labor market with many more job offers than available applicants.

That's where Federal Reserve policy came into play. The central bank rapidly raised borrowing costs starting last year, and even adopted a series of gigantic measures. three quarter point increases: to make borrowing more expensive to buy a house, finance the purchase of a car or accumulate credit card debt. The goal was to cool demand and weaken the booming labor market.

In recent months, a combination of supply chain recovery and slightly weaker demand have combined to begin to significantly reduce inflation. This week's data showed that overall consumer price increases slowed to 3.1 percent in November, well below the 9.1 percent at the summer 2022 peak.

The November edition of The Fed's Preferred Measure of Inflationwhich is different but related and comes out later, its release is scheduled for December 22.

Federal Reserve officials were also encouraged to see that the labor market is cooling. Job offers have declined noticeably and employers are hiring at a solid but no longer accelerated pace. As the supply and demand of workers balance, salary gains They have been slowing down.

Officials believe more modest wage increases could pave the way for slower increases in prices for services — non-physical purchases like haircuts and rent — that have replaced goods as the main driver of inflation.

Historically, efforts to reduce inflation by dramatically slowing demand have ended in a recession. But officials are increasingly hopeful that this time will be different.

Federal Reserve economic projections released Wednesday showed that policymakers expect inflation to return to 2 percent by 2026. They also showed that officials still expect unemployment to rise slightly, reaching 4.1 percent on next year, as growth slows but remains positive.

It would be a big win for the Federal Reserve, especially given that many forecasters were predicting an imminent recession. as recently as Late this spring and early this summer.

Powell reiterated that he has “always” seen a path to slowing inflation without causing much economic pain, and noted that the economy appears to be moving toward what economists call a “soft landing” as the labor market remains strong. . and inflation cools.

“Inflation continues to decline, the labor market continues to regain equilibrium,” Powell said Wednesday. “So far everything is going well, although we assume that it will be more difficult from now on, but so far it has not been like that.”

— Joe Rennison contributed reporting.

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