In a widely expected move, Federal Reserve officials on Dec. 13 held interest rates steady for the third consecutive meeting, but looking ahead, those officials now expect to greenlight multiple rate cuts next year.
The Federal Open Market Committee left the federal funds rate unchanged at a range of 5.25% to 5.5% following its two-day meeting. Since March 2022, the Fed has raised the funds rate, which is now at its highest level since 2001, 525 basis points.
However, the committee's median projection for the federal funds rate at the end of 2024 is now 4.6%, down from the 5.1% it forecast in September, and 3.6% at the end of 2025, down from a projected 3.9% in September.
Fed Chairman Jerome H. Powell said at a news conference Dec. 13 that while the committee is turning more of its attention to potential rate cuts, it hasn't made any decisions.
"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," Powell said. "These are the things we've been wanting to see, (but) we still have a ways to go. No one is declaring victory, that would be premature, and we can't be guaranteed of this progress."
Shortly after the Dec. 13 announcement, market participants indicated there was an 8% probability that the Fed will initiate a quarter-point rate cut at its next meeting and a 56% chance it will do so at its March meeting, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
The committee's decision to maintain rates was unanimous among its 12 members and comes one day after data from the Bureau of Labor Statistics showed that the consumer price index rose 3.1% from a year earlier in November, matching economic forecasts, and slightly below the 3.2% figure recorded in October.
Powell said at the news conference that while inflation has receded, it remains too high. He added that the central bank is committed to bringing inflation down to 2% over time and will keep monetary policy restrictive for as long as necessary to make that a reality.
"In light of the uncertainties and risks, and how far we have come, the committee is proceeding carefully," Powell said. "We will continue to make our decisions meeting by meeting based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks."
The committee's median projection for personal consumption expenditures inflation by the end of 2024 is now 2.4%, down slightly from 2.5% in September. The committee sees PCE inflation decreasing to 2.2% by the end of 2024 and to 2% by the end of 2025.
The 12-month change in total PCE prices came in at 3% in October, down from 3.4% in September, and far from its peak of 7% in June 2022.
Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, said in a statement that she foresees the Fed's first rate cut in June, "With the Fed following a measured approach to reach a policy rate of 4.25 to 4.5% by the end of 2024 — slightly below the updated median policymaker projection."
Watson added, "Market expectations align with this outlook. However, with potential downside risks to economic growth outweighing upside risks to inflation for the first time in several years, we believe there is a growing case for adding duration alongside exposure to high-quality fixed-income assets in 2024."
The committee's next meeting is Jan. 30-31.
