The Federal Reserve decided to forgo an interest rate hike amid reports showing inflation is cooling and signaled that it will cut rates faster than previously anticipated next year.
After a two-day meeting of its Federal Open Market Committee in Washington, D.C., the central bank announced that it will keep its rate target at 5.25% to 5.50%. The move was expected. The overwhelming consensus among investors is that the Fed is done raising rates and will begin trimming them next year.
INFLATION SLOWS TO 0.9% IN NOVEMBER IN PRODUCER PRICE INDEX
The Fed’s updated projections showed that Fed officials are penciling in about three rate cuts in the coming year.
Still, the current rate target is still the highest it has been since 2006, at the outset of the global financial crisis. The last time the central bank raised rates was in July.
The Fed’s goal is for price growth to run at a stable 2% rate.
Recent inflation reports have buoyed optimism that inflation is moving in the right direction.
Inflation, as gauged by the consumer price index, dropped a tenth of a percentage point to 3.1% for the year ending in November, the Bureau of Labor Statistics reported this week. That is down from a red-hot high of about 9% in June of last year.
Additionally, wholesale inflation, as measured by the producer price index, declined three-tenths of a percentage point to 0.9%. On a month-to-month basis, wholesale inflation was flat at 0%.
On Wednesday, officials updated their projections for inflation. Fed officials now see inflation, as gauged by the personal consumption expenditures index, at 2.8% by the end of this year, compared to a September projection of 3.3%. They see inflation falling to 2.4% by the end of 2024.
The Fed kept its forecast for the unemployment rate the same. It predicts the unemployment rate will be at 3.8% by the end of this year and that unemployment will rise to 4.1% by the end of next year.
The committee members additionally revised up their GDP predictions for this year from 2.1% to 2.6% growth. Looking ahead, they predict very modest 1.4% growth in 2024.
There is a growing sense that the Fed might be able to avoid pushing the economy into a recession, a scenario described as a “soft landing.” Late last year, some economic models were predicting there would be a recession by now. Instead, gross domestic product growth (a key recession indicator) has increased this year.
A revision to the third-quarter GDP projections released last month showed that economic growth expanded at a 5.2% seasonally adjusted annual rate in the third quarter of this year, the strongest growth since the pandemic rebound and, before that, 2014.
GDP growth was 2.1% in the second quarter and 2.2% in the first quarter of this year. The Atlanta Fed's “GDP Now” tracker predicts that GDP growth in the final quarter of this year will be 1.2%.
The labor market has also held up remarkably well in the high-interest-rate environment.
Employment growth has been positive now for three years straight, with the last monthly decline in jobs registering in December 2020. The economy again beat expectations in November and added nearly 200,000 more jobs, and the unemployment rate dropped slightly to 3.7%, a healthy level by historical standards.
Still, economists broadly predict there will be some degree of slowdown next year as the barrage of rate hikes over the past 21 months ripples through the economy.
“The key uncertainty for the labor market in 2024 is whether job growth slows to a more sustainable pace, or whether the economy moves from monthly job gains to monthly job losses,” PNC Chief Economist Gus Faucher said. “The former would be consistent with the Fed’s 'soft landing' scenario, while the latter would mean recession. PNC still thinks recession is the more likely outcome in 2024, but it is a close call.”
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The possibility of rate cuts coming next year, perhaps as early as the first quarter, is providing some relief for consumers. For instance, mortgage rates have fallen from their two-decade highs in recent weeks against the backdrop of the cooler inflation reports.
As of Wednesday, the average rate on a 30-year, fixed-rate mortgage was 7.09%, according to Mortgage News Daily, which tracks daily changes in rates. Since mid-October, mortgage rates have fallen by nearly a full percentage point.