(AP) — The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, and its officials signaled that they expect to make three quarter-point cuts to their benchmark rate next year.
The Fed’s message Wednesday strongly suggested that it is finished with rate hikes — after the fastest increases in four decades — and is edging closer to cutting rates as early as next summer.
Speaking at a news conference, Chair Jerome Powell said that Fed officials are likely done raising rates because of how steadily inflation has cooled.
“Inflation keeps coming down, the labor market keeps getting back into balance and, it’s so far, so good,” Powell said after the Fed’s 19-member policy committee ended its latest meeting.
On Wall Street, traders celebrated the prospect of lower rates ahead. Stock prices soared and bond yields sank after the Fed issued its statement and Powell held his news conference.
Wednesday marked a major shift in the central bank’s outlook on interest rates and the economy. Just two weeks ago, Powell had said it was “premature” to conclude that the Fed has finished raising its key benchmark rate or to “speculate” about cuts in that rate.
But on Wednesday, he signaled that the Fed is almost certainly done raising rates. And he acknowledged that the officials had discussed the prospect of rate reductions in their meeting.
He also conceded that his warning, in a high-profile speech last year, that the “pain” of higher unemployment would accompany a sharp decline in inflation, was overly pessimistic. Instead, inflation has slowed significantly toward the Fed’s 2% target, even while unemployment, at 3.7%, and the pace of layoffs, have remained low.
In response to a question, Powell said the Fed recognizes that keeping rates high for too long and waiting too long to cut them, could endanger the economy.
“We’re aware of the risk that we would hang on too long” before reducing borrowing rates, the Fed chair said. “We know that’s a risk, and we’re very focused on not making that mistake.”
What’s happening with the economy?
Pollsters and economists say there has never been as wide a gap between the underlying health of the economy and public perception.
- Easing inflation in 2023 has raised hopes for a gentler Federal Reserve and a strong stock market in 2024. Read more.
- However, small businesses have been both hopeful and anxious about the holidays, taking a cue from their customers.
- Many Americans said in an AP-NORC poll that their household expenses are outpacing earnings, and they worry about their financial futures.
Diane Swonk, chief economist at KPMG, said she thought the Fed’s message Wednesday was: “We’re done.”
The Fed, she said, has the “luxury” of leaving rates elevated, for now, in case the economy and inflation reaccelerate, “while declaring that they’re done hiking, and that cuts are in the making.”
Wall Street investors are betting that rate cuts could begin as soon as March, while economists generally foresee them beginning in May or June.
Throughout his news conference, Powell expressed optimism that inflation, which has bedeviled American consumers and businesses for more than two years, is edging down toward the Fed’s 2% target. He noted, by example, that inflation has eased in goods, housing, and services — three categories the Fed has been closely monitoring.
The Fed chair downplayed one concern that some economists have expressed — that the final step down to 2% inflation, from its current level of about 3%, could be harder than the previous slowdowns in price increases.
“We kind of assume that it will get harder from here,” he said. “But so far it hasn’t.”
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 borrowing, and many other forms of credit. Higher mortgage rates have sharply reduced home sales. Spending on appliances and other expensive goods that people often buy on credit has also declined.
Conversely, interest rate cuts by the Fed, whenever they happen, would reduce borrowing costs across the economy. Stock prices could rise, too, though share prices have already rallied in expectation of rate cuts, potentially limiting any further increases.
So far, the Fed has achieved what few observers had thought possible a year ago: Inflation has tumbled without an accompanying surge in unemployment or a recession, which typically coincide with a central bank’s efforts to cool the economy and curb inflation. Though inflation remains above the Fed’s 2% target, it has declined faster than Fed officials had expected, allowing them to keep rates unchanged and wait to see if price increases continue to ease.
On Wednesday, the Fed’s quarterly economic projections showed that its officials envision a “soft landing” for the economy, in which inflation would continue its decline toward the central bank’s 2% target without causing a steep downturn. The forecasts showed that the policymakers expect to cut their benchmark rate to 4.6% by the end of 2024 — three quarter-point reductions from its current level.
A sharp economic slowdown could prompt even faster rate reductions. So far, though, there is no sign that a downturn is imminent.
In its quarterly projections, the Fed’s policymakers now expect “core” inflation, according to its preferred measure, to fall to just 2.4% by the end of 2024, down from a 2.6% forecast in September. Core inflation, which excludes volatile food and energy costs, is considered a better gauge to inflation’s future path.
The policymakers foresee unemployment rising to 4.1% next year, from its current 3.7%, which would still be a low level historically. They project that the economy will expand at a modest 1.4% next year and 1.8% in 2025.
One reason the Fed could be able to cut rates next year, even if the economy plows ahead, would be if inflation kept falling, 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 intends. Reducing rates, in this scenario, would simply keep inflation-adjusted borrowing costs from rising.
The Fed is the first of several major central banks to meet this week, with others also expected to keep their rates on hold. Both the European Central Bank and the Bank of England will decide on their next moves Thursday.
Shares are mostly higher in Asia after a powerful rally across Wall Street sent the Dow Jones Industrial Average to a record high as the Federal Reserve indicated that interest rate cuts are likely next year.
Tokyo’s Nikkei 225 fell, however, as the yen gained sharply against the U.S. dollar since a weaker dollar can hit the profits of Japanese exporters when they are brought back to Japan.
The Nikkei lost 1% to 32,594.89 while the dollar slipped from about 145 yen to 141.42 yen, its lowest level in four months. The value of the dollar tends to mirror expectations for interest rates, which affect returns on certain kinds of investments.
Toyota Motor Corp.'s shares fell 4.2% and Sony Corp. lost 2.3%. Honda Motor Co. shed 5.2%.
Elsewhere in Asia, Hong Kong’s Hang Seng index climbed 1.1% to 16,408.26 and the Shanghai Composite index was up 0.3% at 2,977.56.
A World Bank report forecast that the Chinese economy will post 5.2% annual growth this year but that it will slow sharply to 4.5% in 2024. The report said the recovery of the world’s second-largest economy from the setbacks of the COVID-19 pandemic was still “fragile.”
Australia’s S&P/ASX 200 jumped 1.6% to 7,373.70 and the Kospi in Seoul advanced 1.1% to 2,536.94. India’s Sensex was up 1.1% and the SET in Bangkok also gained 1.1%.
On Wednesday, the Dow jumped 512 points, or 1.4%, to 37,090.24. The S&P 500 rose 1.4% to within reach of its own record, closing at 4,707.09. The Nasdaq composite also gained 1.4%, to 14,733.96.
Wall Street loves lower rates because they relax pressure on the economy and goose prices for all kinds of investments. Markets have been rallying since October as investors began hoping that cuts may be on the way.
The record close for the Dow Jones Industrial Average:
- Why it matters to investors: The Dow’s rise is an indication that some established, well-known companies such as JPMorgan and newer-economy companies such as Microsoft and Apple are having very good years.
- Does it matter to non-investors? The underlying reasons for the rise in the stock market should matter to all consumers: Inflation is cooling, and it appears the Federal Reserve is done raising interest rates and could start cutting them at some point next year.
- What’s next? Some analysts are expecting more gains for stocks this month and into 2024. Others say the lagging effects of the Fed’s rate cuts could push the economy into a recession at some point next year.
Rate cuts particularly help investments seen as expensive, lower quality, or that force their investors to wait the longest for big growth. Some of Wednesday’s bigger winners were Bitcoin, which rose nearly 4%, and the Russell 2000 index of small U.S. stocks, which jumped 3.5%.
Apple was the strongest force pushing upward on the S&P 500, rising 1.7% to its own record close. It and other Big Tech stocks have been among the biggest reasons for the S&P 500’s 22.6% rally this year.
The Federal Reserve held its main interest rate steady at a range of 5.25% to 5.50%, as was widely expected. That’s up from virtually zero early last year. It’s managed to bring inflation down from its peak of 9% while the economy has remained solid.
In a press conference Wednesday, Fed Chair Jerome Powell said its main interest rate is likely already at or near its peak. He acknowledged, however, that inflation is still too high. Powell said Fed officials don’t want to wait too long before cutting the federal funds rate, which is at its highest level since 2001.
“We’re aware of the risk that we would hang on too long” before cutting rates, he said. “We know that’s a risk, and we’re very focused on not making that mistake.”
Prices at the wholesale level were just 0.9% higher in November than a year earlier, the government reported Wednesday. That was softer than economists expected.
Treasury yields tumbled in the bond market. The yield on the 10-year Treasury dropped to 3.98% early Thursday from 4.21% late Tuesday. It was above 5% in October, at its highest level since 2007. The two-year yield, which moves more on expectations for the Fed, sank to 4.43% from 4.73%.
In other trading, benchmark U.S. crude oil gained 14 cents to $69.61 per barrel in electronic trading on the New York Mercantile Exchange. It picked up 86 cents to $69.47 on Wednesday.
Brent crude, the international standard, was up 25 cents at $74.51 per barrel.
The euro rose to $1.0904 from $1.0876.
Federal Reserve officials are scheduled to release both an interest-rate decision and a fresh set of economic projections on Wednesday, estimates that Wall Street has been eagerly awaiting to understand what next year might bring.
Officials are expected to leave interest rates unchanged in a range of 5.25 to 5.5 percent, the highest level in 22 years. Policymakers had forecast one final 2023 rate increase when they last released their quarterly economic projections, in September. But recent progress in the Fed’s fight against inflation has led investors to expect that the central bank’s next move will instead be to cut rates.
The question now is when the lowering of rates will begin — and how quickly borrowing costs will move down. For hints about that, investors will be looking at the Fed’s fresh forecasts. Here’s how to read the numbers.
The dot plot decoded
When the central bank releases its Summary of Economic Projections each quarter, Fed watchers focus obsessively on one part in particular: the so-called dot plot.
The dot plot will show Fed policymakers’ estimates for interest rates at the end of the next several years and over the longer run. The forecasts are represented by dots arranged along a vertical scale — one dot for each of the Federal Open Market Committee members.
Economists closely watch how the range of 19 estimates is shifting, because it can give a hint at where policy is heading. They fixate most intently on the middle dot, currently the 10th. That middle, or median, official is regularly quoted as the clearest estimate of where the central bank sees policy heading.
The Fed is trying to wrestle down inflation, and to do that, officials have been lifting interest rates to slow spending, crimp business investment and expansion, and cool off the job market. The central bank moved rates up quickly from March 2022 to July 2023.
But policymakers have held rates steady since their July increase. Officials, as of September, had expected one more move, to a range of 5.5 to 5.75 percent, but they are now widely expected to leave interest rates unchanged at this meeting.
The question is how much they expect rates to fall in 2024. If policymakers see borrowing costs at 5.1 percent at the end of 2024, as they did as of September, that would imply just one quarter-point rate cut. If they move that forecast down to 4.8 percent, it would suggest they expect to lower rates twice.
One important trick for reading the dot plot? Pay attention to where the numbers fall about the longer-run median projection. That number is sometimes called the “natural” or “neutral” rate, and it most recently stood at 2.5 percent. It represents the theoretical dividing line between easy and restrictive monetary policy.
What the Fed is saying when rates are above that neutral rate is that they are in economy-restricting territory.
Unemployment projections could be interesting
One of the biggest questions of this cycle of rate increases has been whether the Fed can pull off its task of lowering inflation without causing a big jump in joblessness — what economists often refer to as a “soft landing.”
Page two of the economic projections holds some hints about how Fed officials are thinking about that question.
Fed officials previously projected that unemployment would rise to 3.8 percent by the end of this year, then pop to 4.1 percent in 2024 and 2025. As of November, joblessness stood at 3.7 percent.
An interesting thing to watch on Wednesday will be whether policymakers still think they need notably softer labor market conditions in a world where inflation has already cooled significantly.
Watch the growth outlook
The road toward higher unemployment is paved with slower growth. To slow down the job market, officials typically think they need to cool the overall economy to below its potential — forcing it to walk when it is capable of running.
Growth has surprised the Fed all year, coming in especially strong in the third quarter. Given that, it will be worth watching whether policymakers still expect it to remain modest in 2024: They had previously expected just a 1.5 percent pace by the end of next year, well under the long-run sustainable pace of 1.8 percent.
Approach inflation estimates with caution
Fed officials are likely to predict that inflation will slow in the years to come, in part because they always do. By definition, the Summary of Economic Projections includes forecasts of what the economy will look like if policy is set appropriately — and appropriate policy means an interest rate level that drives inflation back to the Fed’s 2 percent goal over time.
Still, it will be notable just how quickly Fed officials think they can guide inflation fully back to target. In their latest forecast, officials didn’t expect to get back to the target until 2026. But given recent progress, they may be feeling more optimistic now.