The Federal Reserve, in its meeting on December 13, maintained interest rates within the 5.25%-5.50% range. The central bank signaled, through new economic projections, that the extensive tightening of U.S. monetary policy witnessed over the past two years has concluded, and a reduction in borrowing costs is anticipated in 2024.
In the updated policy statement, Federal Reserve officials explicitly acknowledged that inflation "has eased over the past year." They conveyed their intention to monitor the economy for any indications necessitating additional rate hikes, suggesting a departure from the previous stance of aggressive tightening and a bias towards raising rates further.
A substantial majority of 17 out of 19 Fed officials project a lower policy rate by the end of 2024 compared to the current range of 5.25%-5.50%, with the median projection indicating a decrease of three-quarters of a percentage point. No officials foresee higher rates by the end of the following year.
This shift in tone and outlook represents a notable change for an institution that has been cautious in declaring victory over last year's inflation spike to a 40-year high.
The headline personal consumption expenditures inflation is anticipated to conclude 2023 at 2.8%, further dropping to 2.4% by the end of the next year, approaching the Fed's 2% target. The projected rise in the unemployment rate from 3.7% to 4.1% aligns with the September projection, while economic growth is expected to decelerate from an estimated 2.6% this year to 1.4% in 2024.
While the possibility remains for officials to raise the Fed's benchmark overnight interest rate in the coming months if inflation rebounds, recent inflation performance trending towards the central bank's target makes such a scenario increasingly unlikely.
The overall economic projections closely align with the "soft landing" scenario, reflecting the base case for U.S. central bankers, who hope for a continued slowdown in inflation without a recession or a sharp rise in unemployment.
Leading up to this week's meeting, investors anticipated a full percentage point reduction in the Fed's policy rate by the end of next year, aligning closely with the central bank's new projections.
Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EST (1930 GMT) to provide further details on the meeting.
After implementing a rapid 5.25 percentage point increase in the policy rate since March 2022 in response to rising inflation, the central bank has maintained the policy rate since July as inflation approaches its target.