The Federal Reserve made its first indication of 2024 rate cuts Wednesday as it released fresh growth and inflation forecasts that see a weaker economy and slowing inflation.
Watch Federal Reserve Chairman Jerome Powell's live comments below:
The Federal Reserve's Open Markets Committee held its key policy rate at between 5.25% and 5.5%, the highest in 22 years, a move that was widely expected by Wall Street following the last quarter-point rate hike in July.
However, the Fed's new Summary of Economic projections, better-known as the dot plots, now suggests the federal funds rate will fall by 75 basis points , or 0.75%, next year, a sharp pivot from recent comments that had indicated a "higher-for-longer" stance.
Fed Chairman Jerome Powell, in fact, told reporters that he and his colleagues were "aware of the risk that we could hold on for too long" in terms of higher rates, adding the Fed is "very focused on not making that mistake".
Fed officials see core PCE prices, its preferred inflation gauge, ending this year at 2.8% before easing to 2.4% in 2024, with GDP growth falling to 1.4% after ending this year at 2.6%. Headline unemployment, Fed officials forecast, will rise to around 4.1% by the end of next year.
Fed’s updated dots plot pic.twitter.com/ZuR6ERQkSe
— Liz Ann Sonders (@LizAnnSonders) December 13, 2023
"It seems like the Fed has just endorsed the market’s view that the direction of travel for rates is downwards, although not quite the magnitude of cuts next year," said Seema Shah, chief global strategist at Principal Asset Management. "In the space of just three months, the FOMC has delivered a significant about-turn – a pivot if you wish – from emphasizing higher for longer to, now, higher for shorter."
"Certainly, if growth is slowing and inflation is also heading back to target, a few rate cuts will make sense, albeit not quite as much as the five that the market is currently anticipating," she added. "For five to make sense, the economy really needs to stumble and the Fed needs to panic."
U.S. stocks extended earlier gains immediately following the Fed decision and ahead of Chairman Jerome Powell's question-and-answer session with the media. The S&P 500 was marked 55 points higher, or 1.15%, on the session while the Dow Jones Industrial Average was up 417 points and hit a fresh all-time high of 37,057.51 points. The tech-focused Nasdaq was marked 173 points, or 1.15%, higher.
Benchmark 10-year Treasury note yields fell 8 basis points to 4.045% following the interest rate decision while 2-year notes fell 21 basis points to 4.479%.
The U.S. dollar index, meanwhile, gave back most of its gains from earlier in the session and was last marked 1.03% lower at 102.830 against a basket of six global currency peers.
The CME Group's FedWatch is starting to reflect that change, with the odds of a March cut now pegged at 62.3%, with the odds of a follow-on cut in May now trading at 53.8%
The most optimistic reading for 2024 rate cuts, meanwhile, puts the year-end federal-funds rate at between 4% and 4.25%, effectively adding one quarter-point reduction from the Fed's forecasts.
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