Fed holds rates steady; three rate cuts forecasted in 2024
On Wednesday, December 13, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25–5.50%. Today's pause represents the third straight FOMC meeting with no change in the policy rate after hikes in 11 of the 15 prior meetings and a dramatic run-up in rates since the beginning of 2022. The FOMC statement noted slower economic growth in the fourth quarter off the peak in the third quarter and easing inflationary pressures. Differing from the previous statement, the FOMC cited that the Committee will consider "any additional policy firming that may be appropriate to return inflation to two percent over time." Pundits described the addition of "any" as a dovish pivot that additional rate hikes are likely not necessary. Powell explained the addition of "any" by saying that "we are at or near the peak of the policy rate for this cycle."
Impact on rates
The market has viewed Powell and the FOMC decision as dovish, with the belly of the swaps curve —three to seven years — down 20–25 basis points on the day. Since the prior FOMC meeting on November 1, two-year SOFR swap rates have fallen by approximately 55 basis points to 4.20%, while the 10-year Treasury has fallen approximately 71 basis points to 4.03%. As a result of today’s FOMC meeting, the two-year Treasury experienced the largest rally since the banking crisis in March.
The Fed’s dot plot is now more in-line with market expectations, showing three possible rate cuts by the end of 2024, matching economist forecasts. However, a gap remains in the Fed’s expected path of the policy rate and the market’s expectation, with the market now pricing in four hikes by year-end 2024.
Despite seeing a reacceleration in CPI in November, and U.S. financial conditions being at year-to-date highs (according to Bloomberg’s U.S. Financial Conditions Index), Powell noted that the Summary of Economic Projections (SEP) anticipates core inflation to peak at 2.40% in 2024 — previously estimated 2.60% this September — and to cool to 2.20% in 2025, and finally reach the Fed’s target inflation rate of 2.00% in 2026.
Chair Powell and the Fed will remain committed to bringing inflation down to 2.00%. While pivoting from a tightening bias to a more neutral stance, the Committee has not taken additional rate hikes off the table. However, traders and market participants have moved on from any further tightening and will be focusing on the timing of the Fed’s first rate cut and the growing possibility of a “soft landing.” The Fed has so far succeeded in bringing inflation closer to the 2.00% target while maintaining a strong labor market. Powell sees potential rate cuts in 2024 as a return to “normalization” and not a sign of a weakening economy.
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