The Federal Reserve said Wednesday it will hold interest rates steady at a 22-year high for the third consecutive meeting, as US economic growth slows and investors look toward the beginning of rate cuts sometime next year.
The Fed has raised rates 11 times since March 2022 to combat high inflation, which has slowed markedly after hitting a four-decade high last summer.
Still, the central bank hasn’t crossed the finish line just yet. Officials are expecting inflation to cool next year at a slightly faster pace than previously estimated, according to their latest set of economic projections released Wednesday.
Some economists say the final mile of the Fed’s historic inflation fight will be the most difficult, and Fed Chair Jerome Powell and other officials say that additional rate hikes remain on the table.
But Wall Street isn’t buying that. The first rate cut could come in March, according to futures, though the odds of a May rate cut are slightly better.
The Fed’s latest estimates also showed that officials now expect more rate cuts next year than previously estimated. That bodes well for America’s frozen housing market hamstrung by high mortgage rates and weak demand.
There are different reasons why the Fed could begin to cut interest rates. One reason is because an economic downturn is ratcheting up unemployment, and another is because inflation is back to the Fed’s 2% target and higher interest rates are unnecessarily weighing on the economy.
The Fed could also cut rates if inflation slips below 2%, similar to the years leading up to the Covid-19 pandemic.
For now, some are hopeful the central bank is in the midst of achieving the elusive soft landing — a scenario in which inflation returns to the Fed’s target without a sharp rise in unemployment. Such a feat is extremely rare, with some saying it has only happened once in the 1990s. Others argue soft landings have been a bit more common than that.
The US economy remains in good shape — for now
The job market has slowed steadily, but remains solid. US economic growth has cooled dramatically from its red-hot pace in the third quarter, but growth remains in positive territory as the year comes to a close. Black Friday and Cyber Monday sales were record setting.
The economy remains resilient in the face of elevated interest rates, which is why some have grown more confident about the prospect of a soft landing — but that still isn’t guaranteed. Even though inflation remains above 2%, the Fed has a lot to be happy about.
But 2024 will certainly put the economy’s resilience to the test. Americans are continuing to draw down their pandemic savings as their credit card balances grow and economists are expecting the Commerce Department to report Thursday that seasonally adjusted retail sales fell in November for the second straight month, according to FactSet.
“Despite significant progress on inflation and strong economic growth, we believe a “soft landing” — where inflation returns sustainably to the Federal Reserve’s target absent weakness in demand — is unlikely.
The last mile on the path to 2% inflation will be the most difficult,” Vanguard said in an analyst note Wednesday.
“In the year ahead, we expect a combination of below-trend growth, rising unemployment, and slowing wage growth. This would occur as the labor market loosens, in large part because of higher-than-expected labor supply growth.”