Economic Data and Rate Hikes
The decision by the Fed aligns with encouraging economic data on inflation, job market conditions, wages, and consumer spending. Fed officials have paused rate hikes since late summer to assess how the economy responds to their previous actions. While not explicitly stated, the decision to pause sends a clear signal that rate hikes will cease as long as inflation remains on a downward trend.
Statement and Market Response
In their statement following the two-day meeting, officials acknowledged that economic growth has slowed from previous months, while highlighting that inflation has also eased. However, the extent and continuation of these effects remain uncertain. The Dow Jones industrial average rose 200 points (0.55 percent) around 2 p.m., with the S&P 500 index and Nasdaq climbing 0.61 percent and 0.60 percent, respectively.
Economic Projections and Interest Rates
The Fed leaders concluded the year by providing economic projections relating to rates, inflation, unemployment, and overall growth. These projections reveal expectations for three rate cuts in 2024, though without a specific timeline. The unemployment rate is expected to rise slightly to 4.1 percent next year, while inflation is expected to improve over the next 12 months but fall short of the desired 2 percent target.
The Current Benchmark Interest Rate
The Fed’s benchmark interest rate, known as the federal funds rate, remains unchanged between 5.25 and 5.5 percent. This rate is the highest in 22 years and has been set intentionally to restrict borrowing and investment across various sectors, including mortgages, auto loans, and business hiring.
The Road to Rate Cuts
Despite the lack of a concrete timeline for rate cuts, financial markets have shown optimism in the possibility of cuts in 2024. However, before the Fed proceeds with any cuts, it needs confirmation that inflation is on track to meet the target of 2 percent. Currently, inflation stands at 3 percent according to the Fed’s preferred gauge. Although inflation has decreased from its peak in mid-2022, the consumer price index rose by 3.1 percent in November compared to the previous year.
Economic Resilience and Spending Patterns
The housing market, usually sensitive to high mortgage rates, has not experienced a significant downturn due to limited housing availability. Consequently, home prices are once again on the rise. American consumers, despite high inflation, interest rates, and future uncertainties, continue to spend on various leisure activities, generating growth in the labor market and overall economy.
The Inflation Fight and Future Expectations
Fed officials assert that their battle against inflation hinges on a moderation in the labor market and a reduction in consumer spending. They believe that achieving growth below potential remains probable, as they have previously stated.