WASHINGTON (Reuters) – The US Federal Reserve (Fed) on Wednesday, as expected, maintained the target for “fed funds” rates at 5.25%-5.50% for the third time in a row, while its President Jerome Powell indicated that the central bank’s policy rate was approaching if not already peaking.
“We think our policy rate is at or near its peak for this tightening cycle, and the economy still surprises forecasters,” Jerome Powell said during a press conference after of the meeting of the Fed’s monetary policy committee, the FOMC.
“We are ready to further tighten our policy if necessary,” continued the president of the American central bank. While Fed officials “don’t think it will be appropriate to raise rates further,” he said, “they also don’t want to rule out the possibility.”
“The question of when it will be appropriate to cut rates is starting to arise,” added Jerome Powell.
In its press release, the American central bank indicated that its decision had been taken unanimously.
Members of the Fed’s Board of Governors stressed that inflation has “declined over the past year” and indicated that they would monitor activity to see if “further” rate hikes would be necessary – this which implies that after months of monetary tightening, there may no longer be a need to raise rates.
Indeed, 17 of 19 Fed officials expect the policy rate to be below its current level at the end of 2024, with the median projection showing the rate falling three-quarters of a percentage point from the current target of 5.25%. at 5.50%.
No official expects rates to rise by the end of next year.
SOFT LANDING IN SIGHT
The updated projections and the new monetary policy statement mark a notable change of tone for the American central bank, which has until now refused to welcome progress in its fight against inflation.
In its economic forecasts, the Fed anticipates inflation at 2.8% for the end of 2023 and 2.4% for the end of 2024, close to its objective of 2%. The unemployment rate in the United States would increase from 3.7% currently to 4.1%, a projection identical to that of September, while economic growth should slow, from 2.6% this year to 1.4% in 2024.
These projections show that the central bank’s two objectives – supporting the job market and controlling price dynamics – are considered better balanced by Fed officials.
Overall, these forecasts outline the outlines of a “soft landing” for the economy, as desired by American central bankers, who hope that inflation will continue to slow without leading to a recession or a sudden increase in unemployment.
“I always thought that inflation could go down without causing a recession, and at the moment, that’s what we’re seeing,” Jerome Powell said at a press conference.
In the wake of the Fed’s decision and projections, operators have increased the probability that the central bank will reduce its rates in March 2024 to 60%.
“The slightly more accommodating than expected ‘dot plot’ has not reframed market expectations and made financial conditions more flexible, contrary to investors’ expectations,” commented Michael Brown, analyst at TraderX.
Before the Fed meeting, investors were betting that the central bank would cut its key rate by 100 basis points by the end of 2024. The Fed’s new projections are therefore close to those of the markets.
(Reporting Howard Schneider; Corentin Chappron, edited by Jean-Stéphane Brosse and Jean Terzian)
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