The Federal Reserve decided to leave its policy interest rate unchanged at its last meeting of 2023 Wednesday, as largely expected by market participants, with Fed Chair Jerome Powell acknowledging the current interest rate is “likely at or near the peak of this tightening cycle.”
After a cumulative increase of 525 basis points in interest rates since the beginning of the cycle, Powell said the Fed’s restrictive monetary policy stance is exerting “downward pressure on economic activity and inflation.”
The latest Summary of Economic Projections revealed that while Fed officials have raised their GDP growth estimates for this year, they anticipate a slowdown, with the median forecast dropping to 1.4% in 2024.
Fed Sees Rates Falling To 4.6% in ’24, 3.6% in ’25
Powell remarked that participants revised lower their outlook on interest rates. For the end of 2024, the median projection for the federal funds rate is 4.6%, with expectations adjusting downward to 3.6% by the end of 2025 and 2.9% by the end of 2026, signaling an anticipated 75 basis points in rate reductions for 2024.
The updated projections for the Fed’s rate path, although not fully aligned with market forecasts — which suggest cuts of up to 140 basis points in 2024 — appeared more dovish than many had predicted.
Powell brought rate reductions into the conversation, stating: “On rate cuts, that begins to come into view, and is now a topic of discussion.”
He praised recent economic indicators, including moderated growth, a rebalancing labor market and significant progress in controlling inflation. He confidently remarked that these developments do not support the notion of a current recession.
Is It Too Early To Declare Victory?
Taking a cautious stance on inflation, Powell emphasized that reducing inflation to 2% is a gradual process and its success is not guaranteed, asserting, “it’s far too early to declare victory.”
He further clarified the Fed’s readiness to tighten policy if needed, explaining the inclusion of “any” in the December statement as a signal that while the Fed believes the peak has been reached, the possibility of further hikes remains on the table.
When asked if growth surpassing expectations would lead to an adjustment in interest rates, Powell indicated that a robust labor…
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