The Federal Open Market Committee (FOMC) kept interest rates unchanged in the range between 5.25% and 5.50% this Wednesday, in line with investor consensus, signaling a slowdown in inflationary pressures – a message that was well received by financial markets.
In the statement released alongside the decision, the FOMC pointed out that inflation had slowed over the past year, though it remains “elevated,” and recent indicators suggest a deceleration in economic activity compared to the strong pace seen in the third quarter.
The major U.S. indices were up by as much as 0.75% following the announcement, after trading flat earlier.
The FOMC further noted in the statement that when determining the extent of any potential further interest rate hikes needed to bring inflation back to the 2.0% annual target, it would take into account the cumulative effect of Fed Funds rate increases and the lagged effects by which monetary policy affects economic activity.
The statement also pointed to a moderation in job creation, although it remains strong, and a low unemployment rate, factors that could support the beginning of an expected interest rate cutting cycle in the market starting from 2024.
This marked the third consecutive time the Fed kept interest rates unchanged and the fourth since the start of this tightening cycle in March 2022. It is also the longest interest rate hike cycle since 1980 when the Fed engineered a recession to control inflation in the U.S. The interest rate is at its highest level since 2001.
Today’s decision by the FOMC was “unanimous.”
The Dow Jones, Nasdaq 100, and S&P500 indices were up 0.65%, 0.60%, and 0.74%, respectively. At the same time, yields on two-year and ten-year Treasury bonds were down 16.4 and 11.1 basis points, at 4.569% and 4.092%, respectively.
Median projections indicate up to three interest rate cuts in 2024
The median projections of Federal Reserve (Fed, the U.S. central bank) members for the country’s benchmark interest rate indicate that authorities intend to reduce interest rates up to three times in 2024, ending the central bank’s restrictive cycle that began in March 2021.
The median projections for interest rates remained in the range of 5.25% to 5.50% in 2023 – the current level – compared to the range of 5.50% to 5.75% indicated in the September report. In 2024, most members believe in an interest rate between 4.5% and 5%, indicating at least three reductions in the year. For 2025, most members anticipate an interest rate between 3.25% and 3.75%, and there was no consensus for 2026. In the long term, the median remained at 2.5%, confirming the September projections of the Federal Open Market Committee (FOMC) members.
The so-called “dot plot,” a compilation of each FOMC member’s projections for interest rates, showed that the majority of the 17 committee members foresee interest rates falling into the range of 4.5% to 4.75% in 2024, with 6 members signaling this projection, compared to 5 others believing in rates of 4.75% to 5.0%.
For 2025, five members predict that interest rates will fall in the range of 3.25% to 3.5%, with four others projecting rates between 3.75% and 4.0%. In the long term, most members expect interest rates above 2%, with 8 expecting rates to be in the 2.5% range.
Read the full statement on monetary policy decision below:
Recent indicators suggest that economic activity growth has slowed compared to the strong pace seen in the third quarter. Job gains have decreased since the beginning of the year but remain strong, and the unemployment rate remains low. Inflation has declined over the past year but is still elevated.
The U.S. banking system is solid and resilient. Tighter financial and credit conditions for households and businesses are likely to have an impact on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation-related risks.
The Committee seeks to achieve full employment and inflation of 2 percent over the long term. In support of these goals, the Committee has decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any further tightening of policy that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Additionally, the Committee will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is firmly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of information received for economic outlooks. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could threaten the Committee’s objectives. The Committee’s assessments will take into account a wide range of information, including indicators of labor market conditions, inflation pressures and expectations, and financial and international developments.
The following voted in favor of the monetary policy action: Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.