Fed Holds Rates Again. Expect Cuts in 2024

The Federal Reserve held rates steady in its last decision of the year, as expected. It was the third pause in a row, signaling that the central bank is likely done jacking up the federal funds rate, for now. And it looks like cuts are coming in 2024.

The Federal Open Market Committee (FOMC), in a "Summary of Economic Projections" released Wednesday, projects a median of three rate cuts next year among its eight scheduled meetings. At 25 basis point cuts each, that would be a reduction of 75 basis point total. Current interest rates sit at a 22-year high.

The Dow Jones Industrial Average closed at an all-time high of over 37,000 after the Fed's announcement.

At a press conference following the Fed’s decision on Wednesday, Chairman Jerome Powell said the central bank is aware of the risk of waiting too long to cut rates. “We're very focused on not making that mistake,” he said. “We’ve come back into a better balance between the risk of overdoing it and the risk of doing it.”

It’s unlikely that the Fed would wait for inflation to hit its target of 2% before it cuts interest rates. “That policy would be too late,” said Powell. That’s because there's a lag time between when policy decisions are made and subsequent economic impact.

The Fed’s policy decisions aim to reach a so-called “soft landing” where inflation has declined without pushing the economy into a recession. Powell did not commit to a target inflation rate at which the Fed would begin to cut interest rates.

Based on the median forecast from the FOMC, the question is no longer if it will start cutting rates, but when?

Looking back: The Fed’s rate decisions in 2023

• The Fed began hiking rates in March 2022 in an effort to tame inflation that began rising in 2021. 

• Since March 2022, the Fed has raised rates 11 times out of 15 meetings.   

• But in June 2023, the central bank made the decision to pause, then paused again at its September and November meetings. Today’s decision makes four.   

• The current rate range will continue to hold at 5.25%-5.50% into the new year.

What Fed Chair Powell says

• “We believe that we are likely at or near the peak rate for this cycle,” said Powell, adding that the committee is not taking additional hikes off the table if economic conditions demand it. 

• “We are seeing strong growth — that appears to be moderating — we're seeing a labor market that is coming back into balance by so many measures, and we're seeing inflation making real progress. These are the things we've been wanting to see.” 

What rate decisions do to the economy

• When fighting inflation, the Fed aims to lower demand and discourage spending. It can do so by making it more costly to borrow. Rate hikes have pushed up the cost of borrowing for mortgages and other consumer loans, which has made purchasing less viable for borrowers. 

• Inflation has consistently slowed down since its peak in June 2022. The Fed’s target rate is 2%, but it is likely to settle for slightly higher.

• As of Nov. 30, the inflation rate (minus food and energy) is 3.5%, as reflected in the Personal Consumption Expenditures (PCE) price index, which is the Fed’s preferred measure of inflation. 

• Despite elevated inflation, the economy has proved resilient in 2023. Employment remains high, and the most recent gross domestic product (GDP) data shows the U.S. economy grew more than expected in the third quarter.   

• This week, Treasury Secretary Janet Yellen told media outlets that inflation has “meaningfully” come down and the U.S. is on the path to a soft landing. 

• The central bank took a near-term recession off the menu over the summer and hasn’t put it back into its forecasts. 

When will the Fed cut rates in 2024?

• With three pauses in a row and inflation continuing to come down, more hikes aren’t likely. The economy is still vulnerable to external shocks, but the FOMC’s projections strike a more dovish tone than they’ve had in a long time. Again, the committee is forecasting potentially three rate cuts in the next year.

• The Fed will continue to monitor all of the usual suspects: economic growth, inflation and the labor market.

• It’s unclear exactly when the first rate cuts will arrive in 2024. Following today’s announcement, the futures market’s CME FedWatch Tool shows another pause is predicted at the conclusion of the Fed’s next meeting on Jan. 31.

• It’s worth noting that the effects of the Fed’s decisions tend to linger, which means after the Fed begins cutting rates, consumers could still feel the impact of hikes made this year.