Federal Reserve officials will conclude a year of aggressively fighting inflation on Wednesday afternoon, when they are expected to use their final 2023 policy decision to leave interest rates at their highest level in 22 years.
The Federal Reserve is ending the year on pause after the most intense interest rate hike campaign in decades, aimed at stifling the rapid price gains that have been plaguing consumers since 2021.
Because inflation has now moderated substantially, central bankers have increasingly signaled that they may finish raising borrowing costs, which are pegged in a range of 5.25 to 5.5 percent. The question investors will focus on Wednesday is how much rates are expected to fall in 2024 and when those cuts could begin.
The Federal Reserve will release its statement and a new set of quarterly economic projections at 2:00 p.m., followed by a press conference with Jerome H. Powell, Chairman of the Federal Reserve, at 2:30 p.m. Here’s what’s up to observe.
How many cuts are projected?
Investors will closely scrutinize the Federal Reserve’s new economic projections, its first since September. Three months ago, officials expected to raise interest rates once again in 2023 (something now seen as unlikely) before lowering them twice in 2024.
This begs the question: where will policymakers see interest rates at the end of next year? If they keep their projection stable at 5.1 percent, that would now imply only one rate cut. A drop to 4.9 percent would mean two rate cuts are on the cards.
The economic estimates will also give insight into the reasoning behind the rate projections: They will show where officials expect inflation, the unemployment rate and growth to be at the end of the next few years and in the long term.
How soon could lower rates arrive?
One thing the projections won’t offer is insight into when rate cuts might begin. Economic projections only give end-of-year estimates. For clues about timing, Wall Street will have to rely on whatever Powell says during his press conference.
So far, Powell has been hesitant to speculate on when borrowing costs might fall, or even to definitively signal that the Federal Reserve is done raising interest rates.
“It would be premature to confidently conclude that we have achieved a sufficiently restrictive stance, or to speculate on when the policy might be eased,” Powell said during a recent speech.
Fed Governor Christopher Waller said during a recent speech that if Fed officials saw disinflation continuing “for several more months (I don’t know how long it might be, three months, four months, five months) we might feel safe that inflation is really low,” fueling some speculation that the central bank could begin cutting interest rates as soon as early next year.
But Richard Clarida, who was vice chairman of the Federal Reserve until early 2022, said he thought an initial move lower in May or June would be more “natural” if the committee projected two cuts next year.
“Given what we know now, March seems pretty early to me,” he said.
Will it require economic pain?
Powell’s comments will also be in focus for another reason: It could give more clues about what kind of economic conditions the Federal Reserve believes will be necessary to reduce inflation.
So far, price increases have moderated substantially without much pain. Hiring has slowed, but unemployment remains below 4 percent, a historically low level. Consumers have continued to spend, corporate profits are strong and even the rate-sensitive housing market has seen continued activity.
A major reason price increases have moderated despite that continued momentum is that the price of goods has started to fall again. This is partly because demand has decreased, but it is also largely due to the recovery of global supply chains that have brought products to market.
As workers return to the labor market, filling vacant positions, wage increases have also been cooling, which could suggest that labor-intensive service industries will stop raising prices as quickly.
But there are questions about whether this supply-driven price moderation will be enough to reduce inflation the rest of the way.
A Consumer Price Index report this week showed that the widely followed measure of underlying inflation, which excludes fuels and volatile foods, remained at 4 percent in November. This figure is lower than a maximum of 6.6 percent, but the process of slowing that measure has been bumpy.
The question, on which Powell could offer insight, is whether the Fed can squeeze the rest of the economy’s rapid inflation without a marked economic slowdown, achieving what economists often call a “soft landing.”
“The data has been very encouraging,” said Karen Dynan, an economist at Harvard University. “But I don’t think we’re out of the woods yet.”
