The US Federal Reserve holds the interest rate unchanged at a 22-year peak for a third straight month. Additionally, they unveiled fresh forecasts indicating that officials foresee three Federal Reserve interest rate cuts in 2024.
The Federal Reserve interest rate, ranging between 5.25% and 5.5%, has stayed unchanged after a series of 11 consecutive increases from March 2022. This prolonged effort aimed to curb inflation in the economy.
During a press conference, Fed Chairman Jerome Powell conveyed that interest rates are probably at or close to their highest point in the current tightening cycle.
Despite discussions among policymakers about Federal Reserve interest rate cuts in 2024, they haven’t completely ruled out the possibility of further hikes, keeping options open for future decisions.
Impact of Federal Reserve’s Rate Pause
Since July, the Federal Reserve has maintained its fed funds rate, impacting interest rates on mortgages, credit cards, and various loans.
With a notable decline in inflation over recent months, optimism is growing that the Federal Reserve might soon consider reducing rates.
While this could lower costs for consumers and businesses, it may also result in reduced rates for savings instruments like certificates of deposit. Notably, these are currently at levels near their highest in decades.
The potential shift in rates poses a multifaceted impact on both borrowers and savers.
Federal Reserve’s Cautionary Stance
In the public statements made since the November meeting, Fed officials have consistently sought to manage expectations by emphasizing that immediate Federal Reserve interest rate cuts in 2024 shouldn’t be anticipated.
Powell argues that it’s premature to declare monetary policy as restrictive. Officials also emphasized the Fed’s readiness to consider further increases if inflation doesn’t sustain its decline.
Striking a delicate balance, the Fed aims to curtail the economy sufficiently to reduce inflation without triggering a recession.
Shifting Landscape on Rate Cuts Anticipation and Market Impact
Despite Chair Jerome Powell’s statement that policymakers are ready to resume rate increases if price pressures return, the forecasts from him and his colleagues suggest that a year.
Furthermore, Powell’s absence of resistance during the press conference, as investors increasingly anticipated Federal Reserve interest rate cuts in 2024, played a pivotal role in triggering a substantial rally in Treasuries.
This surge in demand for bonds concurrently propelled the Dow Jones Industrial Average to achieve a record high in stock markets.
There are many profound impacts on market expectations regarding Federal Reserve interest rate cuts in 2024.
Quarterly forecasts reveal that Fed officials anticipate more pronounced Federal Reserve interest rate cuts in 2024 of 75 basis points next year, surpassing the pace indicated in September.
Among the 19 committee members, 11 anticipate a year-end 2024 policy rate of no more than 4.625%, indicating a range of 4.5% to 4.7%. In contrast, the remaining eight members are diverse from the fact of Federal Reserve interest rate cuts in 2024.
They believe that the Fed will need to maintain its policy rate at least a quarter-point higher.
This variance underscores the complexity and differing perspectives within the Federal Reserve regarding future interest rate trajectories.
The adjustment to the Fed’s post-meeting statement on Wednesday underscored a change in tone, specifically emphasizing officials’ commitment to monitoring various data and developments to assess the appropriateness of “any” additional policy firming.
Notably, this specific term was absent in the November statement issued by the Federal Open Market Committee. It is signaling a nuanced shift in language and approach to Federal Reserve interest rate cuts in 2024.
In the notable shift, the committee acknowledged that inflation “has eased over the past year but remains elevated.” Furthermore, a majority of participants now perceive the risks to price growth as broadly balanced.
Veronica Clark, an economist at Citigroup Inc., commented, “There’s technically the hiking bias in the statement, and he’s still talking like that, but no one believes that. We all know the next step is cuts, and he confirmed that.”
Projection and Impact of Federal Reserve Interest Rate Cuts in 2024
Before the 2 p.m. release of the Fed’s economic projections, markets indicated a 47% probability of a quarter-point rate cut by the March 20 meeting.
Additionally, there was a 78% likelihood of Federal Reserve interest rate cuts in 2024 occurring by the May 1 meeting. Looking at the entire year of 2024, markets showed slightly better than even odds (54%) for five quarter-point cuts.
Following the releases, the odds of a March rate cut surged to 78%, and the likelihood of 1.25 percentage points in rate cuts for the next year reached 90%.
In fact, markets now indicate a 70% chance of 1.5 percentage points in Federal Reserve interest rate cuts in 2024, potentially lowering the federal funds rate to a range of 3.75% to 4%.
The shifting probabilities reflect the market’s response to the updated economic projections from the Federal Reserve.