Officials at the Federal Reserve expect to cut interest rates three times next year as US inflation continues to fade from its highest level in a generation. The news sparked a rally on Wall Street with the Dow Jones index closing at a record high.
Policymakers opted to hold rates steady at a 22-year high at their latest meeting, as expected, while they scrutinize the impact of their campaign to bring down price growth.
Projection materials released alongside the Fed’s announcement revealed that most members of its rate-setting open market committee had penciled in three rates reductions for the coming year.
“No one is declaring victory. That would be premature,” said Jerome Powell, the Fed chairman. Rates were “likely at or near” their peak, he told reporters, but cautioned that “uncertainties and risks” remain. “The committee is proceeding carefully.”
The comments cheered investors. All three major US indices closed higher, with the Dow rallying 500 points and passing 37,000 level for the first time.
The US’s central bank is closely monitoring the strength of the world’s largest economy, which has remained unexpectedly resilient in the face of the fastest string of rate increases in four decades. Almost 200,000 jobs were added in the labor market last month alone.
Inflation has weakened. The consumer price index, which peaked above 9% in June 2022, rose by 3.1% in November, according to official data released on Tuesday. But many Americans are still grappling with the heightened cost of living, and price growth remains above the Fed’s 2% target.
Hitting this target “will take some time”, Powell said at a news conference. “The lower inflation readings over the past several months are welcome, but we will need to see further evidence to build confidence that inflation is moving down sustainably toward our goal.”
Officials at the Fed convened for their latest policy meeting on Tuesday. They embarked upon an aggressive battle against inflation in March last year, but last ordered a hike in July, and have since opted to wait and see whether they have done enough.
In a statement, the Fed’s rate-setting open market committee announced on Wednesday that the benchmark federal funds rate would stay between 5.25% and 5.5%.
“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news,” said Powell. “But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”
The economic projections revealed that members of the committee expect economic growth to slow from 2.6% this year to 1.4% next, and for unemployment to rise from 3.8% to 4.1%.
They expect the personal consumption expenditures price index – the Fed’s favored measure of inflation – to slip from 2.8% in 2023 to 2.4% in 2024, before hitting 2.1% in 2025.
With less than year to go before the presidential election, the Biden administration is trying to make the case for its economic record to voters. Earlier this week Lael Brainard, director of the national economic council, and former Fed vice-chair, acknowledged there remains “more work to do” to lower costs for consumers, with “many Americans” still facing challenges.
But in a memo distributed by the White House, Brainard described economic growth over the past year as “strong” while inflation declined. “Supply chains have been rebuilt, and productivity is up,” she wrote. “American workers are finishing the year in a stronger position than before the pandemic – with wages and wealth up by more than inflation and strong employment, thanks in part to the President’s Bidenomics agenda.”
