Fed expected to stand pat on interest rates but forecast just two cuts in 2024: Economists
The stock market has been on a tear lately on the belief that the Federal Reserve will cut interest rates more than anticipated next year now that inflation is falling more rapidly even while the resilient economy seems more likely to dodge recession.
But don’t expect the Fed to further stoke that narrative this week.
After a two-day meeting concludes Wednesday, the central bank will almost certainly hold its key short-term interest rate steady for the third straight meeting, all but assuring that Fed officials are done with their most aggressive rate hike campaign in four decades.
All eyes, though, will be focused on the Fed’s forecasts for the economy, inflation and, in particular, interest rates. Although futures markets predict four to five quarter-point rate cuts in 2024, the Fed is likely to pencil in just two, according to Goldman Sachs and Barclays. That’s roughly in line with the Fed’s forecast in September, though that estimate assumed there would be a final hike this month.
“The message they want to convey is to prevent talk about rate cuts,” says Richard Moody, chief economist of Regions Financial. “I think they want to push back on” the market forecasts.
At a recent forum, Fed Chair Jerome Powell said it was “premature” to discuss rate decreases.
Markets aren't buying it and reckon the Fed will start lowering its key rate by spring and slash it from a 22-year high of 5.25% to 5.5% to as low as 4% to 4.25% by year-end.
Why?
Often, the Fed lowers interest rates to help dig the economy out of recession. But with a downturn becoming less likely, officials probably would reduce rates simply because inflation is falling closer to the Fed’s 2% goal, Goldman says in a research note. Fed Governor Christopher Waller recently expressed a similar view.
Has inflation gone down in 2023?
Consumer prices rose 3.2% annually in October on falling energy costs, especially gasoline, down from 3.7% the prior month and a 40-year high of 9.1% in June 2022, according to the Labor Department’s consumer price index. Core prices, which strip out volatile food and energy costs, advanced 4% yearly, down from 4.1%.
Meanwhile, the economy is projected to expand at a less than 2% pace the final three months of the year and in 2024 after sizzling in the third quarter. Job gains and pay increases are also moderating, though they remain solid. That should give the Fed confidence that there won’t be a spike in wages that reignites inflation, Moody says.
The Fed on Wednesday will probably slightly lower its forecast for its preferred annual inflation measure, called PCE, to 2.5% by the end of next year even while it nudges up its 2024 growth forecast to 1.6% and reduces its estimate of the unemployment rate - now 3.7% - at the end of next year to 4%, Goldman says.