Fed signals end to rate hikes and forecasts cheaper credit in 2024

The Federal Reserve maintained the interest rates stable on Wednesday and noted in its new economic projections that the historic tightening of US monetary policy over the past two years has come to an end and that borrowing costs will be reduced in 2024.

In a new monetary policy statement, the US central bank officials explicitly took into account the fact that inflation “has moderated over the last year“and stated that they would monitor the economy to see if it was necessary”some” rate hike more, which directly implies that, after months of aggressive tightening and a trend to raise rates, it may not be necessary to do so again.

In fact, almost unanimously, 17 of the 19 Fed policymakers predict the policy rate will be lower at the end of 2024 than it is now, with a median projection showing the rate will fall three-quarters of a percentage point from the current range. 5.25%-5.50%. No official sees higher rates late next year.

In a subsequent press conference, the president of the institution, Jerome Powell, highlighted the uncertainty of the outlook and said that he cannot definitively rule out an increase in interest rates at this time, despite the fact that the authorities are leaning towards a lowest type.

“Although we believe our policy rate is at or near its peak for the tightening cycle, the economy has surprised forecasters“, said Powell.

Because of the unpredictability of the economy, he said, Fed officials “They don’t see it likely to be appropriate to raise interest rates further, but they also don’t want to take the possibility off the table.” if required.

For an institution that has been reluctant to declare a victory over inflation, which last year reached its highest level in 40 years, the updated projections and the new statement represent a notable change in tone and outlook.

Headline personal consumption expenditure inflation is expected to be 2.8% at the end of 2023 and 2.4% at the end of next year, within striking distance of the 2% target of the Federal Reserve. The unemployment rate would rise from the current 3.7% to 4.1%, the same rate forecast in September, while economic growth would slow from the 2.6% estimated for this year to 1.4% in 2024.

Although those responsible for the Federal Reserve remain free to raise the benchmark overnight interest rate again in the coming months if inflation resurfaces, this seems increasingly less likely given the recent behavior of inflation, which has been getting closer to the target of the central bank.

The economic projections, as a whole, cling to the scenario of “soft landing” which has become the base case scenario for US central bankers, who expect inflation to continue slowing without a recession and a sharp rise in unemployment.

Investors ahead of this week’s meeting were betting that the Fed would cut its monetary policy rate a full percentage point by the end of next year, putting the central bank’s new projections almost in line with the views of financial agents.