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Portfolio > Economy & Markets

Fed Pivots to Rate Cuts as Inflation Heads Toward 2% Goal

By Catarina Saraiva

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The Federal Reserve held interest rates steady for a third meeting and gave its clearest signal yet that its aggressive hiking campaign is finished by forecasting a series of cuts next year.

Officials decided unanimously to leave the target range for the benchmark federal funds rate at 5.25% to 5.5%, the highest since 2001.

Policymakers penciled in no further interest-rate hikes in their projections for the first time since March 2021, based on the median estimate.

While Chair Jerome Powell didn’t foreclose on the possibility that officials could hike again if price pressures return, he indicated policymakers are now turning their focus to when to cut rates as inflation continues its descent toward their 2% goal.

Absent pushback on near-term rate cuts from the Fed chief, Treasuries surged and stocks jumped, while traders boosted bets on a March reduction to a near certainty.

Quarterly projections showed Fed officials expect to lower rates by 75 basis points next year, a sharper pace of cuts than indicated in September. While the median expectation for the federal funds rate at the end of 2024 was 4.6%, individuals’ expectations varied widely.

Eight officials saw fewer than three quarter-point cuts next year, while five anticipate more.

The Fed's December Dot Plot

Powell emphasized the projections are not a pre-set plan, and said policymakers aren’t ready to take further interest-rate increases off the table if needed to quash resurgent price pressures.

Still, he acknowledged that officials at this week’s meeting discussed the question of when it will become appropriate to begin cutting rates.

“That begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today,” he said at a press conference following the meeting.

A tweak to the Fed’s post-meeting statement on Wednesday also highlighted the shift in tone, with officials noting they will monitor a range of data and developments to see if “any” additional policy firming is appropriate.

That word was not present in the November statement from the US central bank’s policy-setting Federal Open Market Committee.

In another shift, the committee also acknowledged that inflation “has eased over the past year but remains elevated.” In addition, most participants now see the risks to price growth as broadly balanced.

Inflation Forecasts

The updated projections also showed lower inflation forecasts for this year and next, with the Fed’s preferred price gauge excluding food and energy now seen increasing 2.4% in 2024.

Policymakers lowered their forecast for economic growth slightly for next year while keeping unemployment projections unchanged.

Policymakers anticipate further reductions in the fed funds rate to end 2025 at 3.6%, according to the median estimate of 19 officials.

The Fed’s long-awaited pivot, following 5.25 percentage points of rate hikes, reflects a marked slowing of price pressures since mid-year and a cooling of the labor market. The challenge for Fed officials now is to decide when to start cutting rates, which if done too soon would endanger inflation’s return to the Fed’s 2% goal.

Comments from Governor Christopher Waller, one of the most vocal supporters of the central bank’s actions to tamp down inflation, helped fuel that speculation. He said in November the central bank would be willing to consider lowering the policy rate as inflation comes down, something he said could happen in three to five months.

Yield Pullback

The pullback in Treasury yields in recent weeks has erased much of the run-up seen through the summer and into October. At the time, policymakers suggested the significant tightening in financial conditions could help lessen the need for further interest rate hikes.

The stark reversal has already begun to ripple through the economy in the form of lower mortgage rates, sparking renewed demand in recent weeks to refinance and purchase homes. It’s also gotten cheaper for companies to borrow — something they’re already taking advantage of.

Powell’s comments Wednesday suggested a shift from remarks less than two weeks ago, when he pushed back against market expectations for a rate cut in the first quarter of next year.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he said Dec. 1, right before the Fed’s pre-meeting communication blackout period.

Still, Chair Jerome Powell emphasized the projections are not a pre-set plan, and said policymakers are not prepared to take further interest-rate increases off the table if needed to quash resurgent price pressures.

“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured,” he said during a press conference following the Fed’s policy meeting Wednesday. “We are prepared to tighten policy further, if appropriate.”

(Credit: Adobe Stock)

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