On Wednesday, the Federal Reserve announced its decision to maintain interest rates, signaling a potential end to its historic tightening of monetary policy. Jerome Powell, the Fed Chair, hinted at a shift in their approach, suggesting that rate hikes weren't being projected in their latest economic outlook. Powell emphasized the belief that enough had been done, indicating that rate increases were no longer the primary consideration.
This departure from previous strategies came amidst a notable decrease in inflation rates and a balanced economic landscape showing potential signs of a slowdown without a severe downturn. According to Fed projections, headline personal consumption expenditures inflation is expected to end 2023 at 2.8% and further decline to 2.4% by the end of the following year, moving closer to the Fed's 2% target. Simultaneously, the unemployment rate is projected to rise marginally from 3.7% to 4.1% by the end of 2024, while economic growth is expected to decelerate from an estimated 2.6% this year to 1.4% Ghriaghwutnk024.
Diane Swonk, chief economist at KPMG US, expressed that if the current economic trend persisted with cooling inflation and a gradually slowing yet stable economy, the Fed might consider rate cuts sooner rather than later. Indeed, the shift in the Fed's outlook was evident, with a majority of policymakers predicting lower rates by 2024. Powell highlighted the Fed's delicate balance in acknowledging both inflation control and maintaining a healthy economy, expressing caution about potentially over-tightening and causing an unnecessary economic slowdown.
Powell emphasized the Fed's commitment to achieving stable prices and maximum employment. He noted their optimism about the economy's direction, indicating moderation in growth and a labor market inching towards balance. Powell highlighted that while progress was evident, premature celebration was unwarranted, leading to the critical question of when to initiate policy adjustments.
The Fed's decisions in the upcoming weeks and months will revolve around discussions regarding scaling back measures put in place during the pandemic, including reducing asset purchases and swiftly increasing the benchmark interest rate from near-zero to the current 5.25%-5.50% range.
Following the Fed's announcements, the U.S. stock market responded positively, with significant gains in major indices, while the U.S. dollar weakened against other currencies, and U.S. Treasury yields dropped. Traders of futures contracts that settle to the Fed's policy rate are pricing in a March start for rate cuts and an end-of-2024 policy rate 1.5 percentage points below the current level.
The market reaction reflected expectations of potential rate cuts, projecting a March start for these cuts and a policy rate by the end of 2024 considerably lower than the current level. Analysts and investors interpreted these developments as the start of a potential easing cycle by the Fed.
Powell's remarks and the updated economic projections showcased a notable shift in the Fed's stance, emphasizing a favorable trajectory for inflation and a balanced economic outlook. This shift in strategy hinted at a potential shift towards a more accommodative policy stance by the future.