NY Times

Jeanna Smialek

Updated Dec. 13, 2023, 3:06 p.m. ET22 minutes ago22 minutes ago

Jeanna Smialek

Fed officials leave rates unchanged and forecast three cuts next year.

Federal Reserve officials left interest rates unchanged in their final policy decision of 2023 and forecast that they will cut borrowing costs three times in the coming year, a sign that the central bank is shifting toward the next phase in its fight against rapid inflation.

Interest rates are now set to a range of 5.25 to 5.5 percent, where they have been since July. After making a rapid series of increases that started in March 2022 and pushed borrowing costs to their highest level in 22 years as of this summer, officials have now held policy steady for three straight meetings.

Policymakers are striking that patient stance to give themselves time to assess whether interest rates are high enough to weigh on the economy and ensure that inflation will slow to the Fed’s 2 percent target over time. Price increases have been cooling for months and hiring has slowed, which has been giving officials more confidence that their current setting may be sufficient.

Investors are watching closely for any hint at when — and how much — interest rates will fall. Fed policymakers projected on Wednesday that they will lower borrowing costs to 4.6 percent by the end of 2024, down notably from their previous 5.1 percent estimate. The forecast implies that officials will make three rate cuts next year. That call for lower rates was widespread: Not a single Fed official expected interest rates to be higher at the end of next year.

The Fed’s quarterly economic projections, the first set it has released since September, also showed that central bankers expect inflation to fade slightly more quickly than officials had previously forecast.

Even as Fed officials laid out an optimistic vision of the future — one that suggests they may well pull off a “soft landing,” cooling inflation without painful economic consequences — policymakers did not firmly declare victory. They kept alive the possibility of further rate increases if inflation should prove stubborn.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment — that’s very good news,” Jerome H. Powell, the Fed chair, said during a news conference following the release on Wednesday. Still, he emphasized that “the path forward is uncertain.” 

Fed officials in their statementnoted that inflation had “eased over the past year” but “remains elevated,” and promised to watch a broad array of data to determine the extent of “any additional policy firming that may be appropriate.”

Data this week showed overall consumer price increases slowing to 3.1 percent in November, down sharply from 9.1 percent at the peak in the summer of 2022.

The combination of cooling price increases and a gently moderating job market have combined to give central bankers more confidence that they might be able to successfully return inflation to a normal pace without inflicting major job market pain in the process.

The Fed’s fresh forecasts suggested that “inflation is less of a problem than it was even three months ago, and expressed optimism about their ability to bring inflation down,” said Gennadiy Goldberg, a rates strategist at T.D. Securities.

Historically, efforts to lower inflation by slowing demand sharply have ended in a recession. But officials are increasingly hopeful that this time might be different.

The Fed’s economic projections released Wednesday showed that policymakers expect inflation to return to 2 percent by 2026. They also showed that officials still expect unemployment to reach 4.1 percent next year, as growth slows slightly more quickly than was previously forecast.

Now, investors are likely to focus on any clues about when exactly the Fed might begin to lower interest rates if the economy evolves as expected. The economic projections show where rates will be at the end of 2024, but give little hint about the timing of policy adjustments

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