Federal Reserve officials left interest rates unchanged in their final 2023 policy decision and forecast they will cut borrowing costs three times in the coming year, a sign that the central bank is is heading into the next phase of its fight against rapid inflation.
Interest rates are set in a range of 5.25 to 5.5 percent, where they have been since July. After making a series of rapid increases that began in March 2022 and pushed borrowing costs to their highest level in 22 years as early as this summer, officials kept their policy unchanged for three consecutive meetings.
This patient stance has given policymakers time to assess whether interest rates are high enough to weigh on the economy and ensure that inflation will slow to the Fed’s 2% target over time. time – and increasingly, slowing inflation and a cooling labor market have convinced them that policy is in the right place. Jerome H. Powell, the Fed Chairman, said at his news conference Wednesday that officials no longer expect interest rates to rise again.
In fact, Fed policymakers projected Wednesday that they would cut borrowing costs to 4.6% by the end of 2024, down notably from their previous estimate of 5.1%, issued in september. Forecasts imply that authorities will make rate cuts of three-quarters of a point next year.
Markets cheered as Fed policymakers painted an optimistic vision of a future with lower interest rates. The S&P 500 index soared following the Fed’s policy decision and continued to climb as Mr. Powell spoke, yields on major government bonds fell and investors increasingly bet the Fed could reduce its rates as early as March.
Mr. Powell avoided declaring victory on inflation and avoided commenting on when rate cuts might begin or what criteria would justify them. He nonetheless struck a sunny tone at his news conference, celebrating recent progress on inflation and expressing cautious hope that it could continue to slow without causing serious economic pain.
“Inflation has fallen from its peaks, and this has happened without a significant increase in unemployment – this is very good news,” Powell said, while stressing that “the path forward is uncertain “.
Inflation has already surprised officials by accelerating after a slowdown, and policymakers made clear Wednesday that they could raise rates further if prices jump unexpectedly.
“Participants did not note additional increases,” Mr. Powell said. “The participants also did not want to rule out the possibility of further increases.”
But even with that caveat, the overall message was that “they feel much better about monetary policy and are looking at a rate cut next year,” said Matthew Luzzetti, chief U.S. economist. at Deutsche Bank. He said he thinks the Fed could work out as early as January what would justify a rate cut.
The call for a rate cut was widespread, as evidenced by Wednesday’s announcement: not a single Fed official expected interest rates to be higher at the end of the year next.
This change in outlook comes as the U.S. economy makes significant and long-overdue progress toward slower price increases.
Americans have faced rapid inflation since prices began rising rapidly in early 2021. Costs initially surged as global supply chains became tangled and shortages emerged for products such as cars and furniture. Inflation was then exacerbated by rising fuel and food prices following Russia’s invasion of Ukraine in 2022.
These major shocks came up against strong demand: households had saved a lot of money during the pandemic, partly thanks to government aid. By spending enthusiastically, businesses had the means to raise prices without scaring off customers. Companies themselves began paying more as they tried to attract workers in a strong job market, offering far more job openings than available candidates.
This is where Fed policy came into play. The central bank rapidly increased borrowing costs starting last year – even making a series of giant three-quarter point increases – to make it more expensive to borrow to buy a house, finance the purchasing a car or accumulating funds. credit card debt. The aim was to dampen demand and weaken the booming job market.
In recent months, the combination of a healing supply chain and a slight slowdown in demand have combined to start to bring inflation down significantly. Data this week showed that overall consumer price inflation slowed to 3.1% in November, down sharply from 9.1% recorded at the summer 2022 peak.
The November edition of the Fed’s preferred inflation measure, which is different but related and released more late, is scheduled to be released on December 22.
Fed officials were also heartened to see that the labor market was cooling. Job openings are down noticeably and employers are hiring at a steady, but more rapid, pace. As the supply and demand for workers come into balance, wage gains slow.
Officials believe more modest wage increases could pave the way for slower rises in prices for services – non-physical purchases like haircuts and rent – which have overtaken goods as the main driver of inflation.
Historically, efforts to reduce inflation by sharply slowing demand have ended in recession. But officials are increasingly hopeful that this time will be different.
The Fed’s economic projections released Wednesday showed that policymakers expect inflation to return to 2% by 2026. They also showed that officials still expect unemployment to rise slightly, reaching 4.1% next year, as growth slows but remains positive.
This would be a big victory for the Fed, especially considering that many forecasters were predicting an impending recession as recently as late spring and early summer.
Mr. Powell reiterated that he had “always” seen a path to slowing inflation without causing much economic pain, and noted that the economy does indeed appear to be progressing toward what economists call a “soft landing.” » while the job market remains strong. and inflation is cooling.
“Inflation continues to fall, the labor market continues to rebalance,” Mr. Powell said on Wednesday. “So far so good, although we kind of assume it will get harder from here, but so far it hasn’t.”
—Joe Rennison contributed reporting.