Federal Reserve officials on Wednesday suggested that victory over inflation is within sight, signaling that they are likely done raising interest rates and that borrowing costs will go down somewhat next year.
Members of the central bank’s rate-setting committee agreed to hold their main policy rate steady in their last vote of the year, a reflection of mounting data showing that price spikes continue to cool. The Fed’s preferred inflation gauge rose 3 percent over the 12 months ending in October, and officials projected it would fall to 2.8 percent by the end of the year, inching closer to their 2 percent target.
“Inflation has eased over the past year but remains elevated,” the Fed said in a post-meeting statement.
The central bank said it was watching the data to determine if “any additional” rate hikes might be appropriate — a wording suggesting a higher hurdle to raising borrowing costs further.
The move is another hopeful sign that the U.S. economy might conquer inflation without a recession or a sharp rise in joblessness, a potential boon to President Joe Biden as he seeks reelection.
Still, holding rates at punishing levels will continue to bite into economic activity. As inflation has fallen, investors have speculated intensely on when the central bank might begin to lower rates from their current setting, designed to actively slow the economy in an effort to tame rising prices.
Fed Chair Jerome Powell himself has acknowledged rate cuts would come before the Fed reaches its 2 percent target to avoid unnecessarily tanking the economy. But Fed officials want to feel confident that inflation is on its way back to 2 before they ease off.
In new projections released Wednesday, Fed policymakers said they expect to lower rates next year. The committee was split on how much they might need to cut, with the majority expecting their main policy rate to end 2024 somewhere between a half a percentage point and a full percentage point lower than where it is now. That rate is currently set between 5.25 percent and 5.5 percent.
Fed officials also expect joblessness to rise slightly to 4.1 percent next year from 3.7 percent, where it stands now, though that would still be a very low unemployment rate by historical standards.
They also see their preferred inflation measure, the personal consumption expenditure index, falling to 2.4 percent next year.