With Fed Rate Hikes Likely Done, Powell Says Timing of Cuts is the Next Question

WASHINGTON (Reuters) — The Federal Reserve left interest rates unchanged on Wednesday and U.S. central bank chief Jerome Powell said the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view.”

Powell’s remark, made in a press conference following the end of the central bank’s final policy meeting of the year, dovetailed with projections from all 19 policymakers that showed near unanimity that borrowing costs would fall in 2024, many of them by a substantial margin.

“You see that people are not writing down rate hikes: that’s us thinking that we have done enough,” Powell said.

While Fed policymakers did not want to take another rate hike off the table, it is no longer the central bank’s “base case,” he said. The timing of rate cuts “is really the next question: that’s what people are thinking about, and talking about,” he said, with a “general expectation” that a future meeting would feature such a discussion.

The newest projections also showed policymakers see the risks to inflation and employment – the two planks of the Fed’s dual mandate – were coming into better balance.

And though it is too early to declare victory, Powell said, “the question of when will it become appropriate to begin dialing back the amount of policy restraint: that begins to come into view.”

U.S. stocks jumped following the release of the statement and projections, continued climbing during Powell’s press conference and closed sharply higher, with the S&P 500 index gaining about 1.4% and the Dow Jones Industrial Average hitting a record high. The U.S. dollar dropped against a basket of currencies and U.S. Treasury yields fell.

“A marginally more dovish-than-expected ‘dot plot’ doesn’t exactly provide the pushback on market pricing and looser financial conditions that most had been expecting,” said Michael Brown, a market analyst at TraderX, referring to the distribution of Fed officials’ policy rate projections.

Traders of futures contracts that settle to the Fed’s policy rate are pricing in a March start to rate cuts and an end-of-2024 policy rate 1.5 percentage points below the current 5.25%-5.50% range.

NOTABLE SHIFT

For an institution that has been reluctant to declare victory over inflation that spiked last year to a 40-year high, the updated projections and Powell’s tone mark a notable shift in tone and outlook.

Headline personal consumption expenditures inflation is seen ending 2023 at 2.8% and falling further to 2.4% by the end of next year, within striking distance of the Fed’s 2% target.

That comes at little comparative cost in terms of higher joblessness, with the unemployment rate seen rising from the current 3.7% to 4.1%, the same rate projected in September, while economic growth is seen slowing from an estimated 2.6% this year to 1.4% over 2024.

“It’s so far, so good,” Powell said, though he added that it’s hard to know if that will continue.

While officials remain free to raise the Fed’s benchmark overnight interest rate again in coming months if inflation resurges, that seems increasingly unlikely given the recent performance of inflation that has edged steadily towards the central bank’s target.

The economic projections, as a whole, cling closely to the “soft landing” scenario that has become the base case for U.S. central bankers hoping that inflation continues to slow without a recession and sharp rise in unemployment.

Investors ahead of this week’s meeting bet that the Fed would cut its policy rate by a full percentage point by the end of next year, putting the central bank’s new projections nearly in line with the views of financial markets.

After raising the policy rate by 5.25 percentage points since March of 2022 in one of the swiftest Fed reactions to rising price pressures, the central bank has now kept the policy rate on hold since July as inflation edges closer to its target.