Photo: Canadian Press
File – Federal Reserve Chairman Jerome H. Powell speaks during a press conference at the Federal Reserve in Washington, November 1, 2023. When its latest policy meeting ends on Wednesday, the Fed will provide some highly anticipated hints on the extension of rate cuts next year. (AP Photo/Susan Walsh, File)
The Federal Reserve kept its benchmark interest rate unchanged on Wednesday for the third time in a row, a sign it has likely stopped raising rates after it imposed the fastest series of increases in four decades to combat painfully high inflation.
Fed policymakers have also signaled that they expect to make three 25-percentage-point cuts to their benchmark interest rate next year. These anticipated rate cuts — which likely wouldn't begin until the second half of 2024 — suggest policymakers think high borrowing rates will still be needed for much of next year to further slow spending and inflation.
In a statement issued after the meeting of its 19-member monetary policy committee on Wednesday, the Fed said that “inflation has declined over the past year but remains high.” It was the first time since inflation first soared in 2021 that the Fed formally acknowledged progress in its fight against accelerating prices. It also gave an indication that its rate reduction efforts may be over, saying it is considering whether “any” additional increases are needed.
The Fed kept its benchmark rate at about 5.4%, its highest level in 22 years, a rate that has led to much higher costs for mortgages, auto loans, business loans and many other forms of credit. Higher mortgage rates have drastically reduced home sales. Spending on household appliances and other expensive goods that people often buy on credit has also declined.
So far, the Fed has achieved what few observers thought possible a year ago: inflation has fallen without a rise in unemployment or a recession, which typically coincide with a central bank's efforts to cool the economy and contain inflation. While inflation remains above the Fed's 2% target, it has declined more quickly than Fed officials expected, allowing them to keep rates unchanged and wait to see if price increases continue to abate.
At the same time, the government's latest report on consumer prices showed that inflation in some areas, especially in health care, apartment rents, restaurant meals and other services, remains persistently high, one of the reasons why Fed Chairman Jerome Powell is reluctant to signal that policymakers are prepared to cut rates anytime soon.
On Wednesday, the Fed's quarterly economic projections showed that officials foresee a “soft landing” for the economy, in which inflation would continue to decline toward the central bank's 2% target without causing a sharp slowdown. . Forecasts showed that policymakers expect to reduce their benchmark rate to 4.6% by the end of 2024 – three quarter percentage point reductions from its current level.
A strong economic slowdown could trigger even faster rate reductions. So far, however, there are no signs that a recession is imminent.
In their quarterly projections, Fed policymakers now expect “core” inflation, according to their preferred measure, to fall to just 2.4% by the end of 2024, below the 2.6% forecast in September . Underlying inflation, which excludes volatile food and energy costs, is considered a better indicator of the future path of inflation.
Policymakers expect unemployment to rise to 4.1% next year from the current 3.7%, which would still be a historically low level. They project the economy will expand a modest 1.4% next year and 1.8% in 2025.
Interest rate cuts by the Fed, whenever they occur, would reduce borrowing costs across the economy. Stock prices could also rise, although stock prices have already risen in anticipation of rate cuts, potentially limiting any further increases.
Powell, however, has recently downplayed the idea that rate cuts are imminent. He hasn't even signaled that the Fed has conclusively completed its hikes.
One reason the Fed might be able to cut rates next year, even if the economy grows, would be if inflation continues to fall, as expected. A steady slowdown in price increases would have the effect of raising inflation-adjusted interest rates, thereby making borrowing costs higher than the Fed intended. Lowering rates in this scenario would simply prevent the rise in borrowing costs. financing adjusted for inflation.
Recent economic data has modestly tempered financial markets' expectations for early rate cuts. Last week's jobs report for November showed that the unemployment rate fell to 3.7%, near a half-century low, down from 3.9%, as companies engaged in solid hiring. Such a low unemployment rate could force companies to continue raising wages to find and retain workers, which would fuel inflationary pressures.
And consumer prices remained largely unchanged last month, the government said Tuesday, suggesting that while inflation is likely to return to the Fed's 2% target, it could take longer than optimists expect. The central bank, as a result, could choose to maintain rates at their current level to try to ensure that prices resume their downward trajectory.
The Fed is the first of several major central banks to meet this week, and others are also expected to keep their rates unchanged. Both the European Central Bank and the Bank of England will decide their next steps on Thursday.