“Federal Reserve Holds Rates, Anticipates Three Cuts in 2023”

The Federal Reserve maintained interest rates for the third consecutive time on Wednesday, suggesting that the prolonged effort to combat high inflation might be concluding. Policymakers anticipate a series of cuts in 2024. The decision kept interest rates stable within a range of 5.25% to 5.5%, marking the highest level in 22 years.

Additionally, policymakers indicated the possibility of multiple rate cuts in the coming year, acknowledging signs of an economic slowdown in response to tighter monetary policy.

The recently presented quarterly economic projections reveal that a majority of participants in the meeting anticipate a decrease in rates to 4.6% by the end of 2024, implying the likelihood of at least three quarter-point rate cuts in the coming year. Furthermore, policymakers have outlined additional rate reductions in 2025 and 2026.

Notably, there is no expectation among officials for rates to increase in the upcoming year. The market response was positive, with stocks experiencing a surge and bond yields declining following the decision. The Dow Jones Industrial Average achieved a historic milestone, surpassing 37,000 for the first time.

In the post-meeting statement, the Federal Open Market Committee acknowledged that “inflation has eased over the past year but remains elevated.” The committee expressed its commitment to monitoring the economy for any indications necessitating “any” additional rate hikes, signaling a prevailing belief among officials that further tightening is presently unnecessary.

“The US adds 1,99,000 new jobs in the month of November.”

The move signifies a significant change in the Fed’s policy approach this year, transitioning from a prolonged higher interest rate strategy to a shorter duration. This awaited shift concludes an intensive tightening initiative where interest rates were raised 11 times since March 2022, aiming to curb inflation and cool the economy.

Heightening interest rates typically lead to increased rates on consumer and business loans, prompting a slowdown in the economy as employers cut back on spending. The impact is evident, with the average rate on 30-year mortgages exceeding 8% for the first time in decades. Borrowing costs for various purposes, including home equity lines of credit, auto loans, and credit cards, have also surged.

In just 16 months, interest rates escalated from near zero to over 5%, marking the swiftest tightening pace since the 1980s. Despite a considerable decrease in inflation recently, it still registers at 3% compared to a year ago, based on the latest Labor Department data. Americans are grappling with higher expenses for essentials like food, medical care, and rent.

Despite the rapid rate increase, consumer spending persists, and businesses continue hiring. The labor market maintains a robust pace, with employers adding 199,000 new workers in November. Job openings remain abundant, and the unemployment rate dropped to 3.7% from 3.9%.

Recent forecasts from central bankers indicate expectations of a slight increase in the jobless rate to 4.1%, consistent with the September estimate. Additionally, they anticipate a cooling of inflation to 2.4% next year, lower than the 2.5% forecast in September, with a further decline to 2.1% in 2025.

Summing up the December policy meeting, the Federal Reserve envisions a soft landing, achieving full employment and planning to decrease its federal funds policy rate by at least 75 basis points in 2024 to support ongoing business expansions, as noted by Joe Brusuelas, RSM chief economist.

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