“People generally think that we’re at or near [the final level], and think it’s not likely that we will hike,” Fed Chair Jerome H. Powell said, referring to his fellow officials. “They don’t take that possibility off the table.”
The interest rate announcement was expected, on the heels of encouraging economic data on inflation, the job market, wages and consumer spending. Since late summer, Fed officials have stopped doling out rate hikes, instead waiting to see how the economy responds to their moves so far.
Markets popped on hopes that borrowing costs would come down in the near future. The Dow Jones Industrial Average jumped 431 points, or 1.18 percent, off Powell’s remarks. The S&P 500 index climbed 1.29 percent, and the Nasdaq 1.32 percent.
Policymakers closed out the year with a fresh crop of economic projections, outlining their expectations for rates, inflation, the unemployment rate and overall growth. Those estimates showed three rate cuts in 2024, though no specific timeline was given. Fed leaders stuck to previous estimates that the unemployment rate would rise slightly next year, to 4.1 percent. And they showed inflation improving over the coming 12 months, but not quite reaching the desired 2 percent target.
Wednesday’s decision leaves the Fed’s benchmark interest rate, known as the federal funds rate, between 5.25 and 5.5 percent. That’s the highest level in 22 years, and it’s set at a point intended to slow all kinds of borrowing and investment, from mortgages and auto loans to business hiring.
Now the Fed’s plan is to keep rates high for as long as it takes to snuff out the remaining sources of inflation. The idea is that high borrowing costs will keep a tight grip on the economy, even if officials have moved past the hiking phase.
But it’s not yet clear how long rates will stay at their current level before they start to come down. Over the past few weeks, financial markets have been jubilant over the possibility of cuts in 2024, despite the fact that Fed officials are far from giving any sort of concrete timeline. The Fed’s latest projections do include rate cuts next year. But those forecasts are routinely revised and aren’t binding.
Before the Fed even comes close to cutting, though, officials will have to be sure that inflation is on track to meet the more normal 2 percent target. (Inflation is currently at 3 percent, using the Fed’s preferred gauge.) There’s been serious progress in that direction. Overall inflation has come down from a summer 2022 peak, with the consumer price index rising 3.1 percent in November, compared with the year before. Demand is slowing, too. Higher rates mean businesses are having have a harder time getting loans. And though the job market is still tight, it’s no longer growing like gangbusters.
At the same time, many parts of the economy haven’t experienced much of a dip at all. Typically, high mortgage rates zap demand for housing, since a few extra percentage points on a loan can price shoppers out of their search. But because there are so few homes available, a housing downturn from earlier this year was short-lived, and home prices are climbing once again.
By now, economists would have also expected consumers to pull back on spending, either because of high inflation, high interest rates or uncertainty about what’s to come. But Americans are continuing to spend big on concerts, vacations, movies and more, helping propel the labor market and overall economic growth.
The open question is how long that momentum can stick around. Fed officials still say their inflation fight will require some softening in the labor market, plus a pullback in consumer spending. To what extent? No one knows.
Speaking after the Fed’s last meeting, Fed Chair Jerome H. Powell said the recent progress on inflation, combined with a resilient job market, was “a historically unusual and very welcome result.” But he said it was still likely that “we will need to see some slower growth and some softening in the labor market … to fully restore price stability.”
“We’ve been saying that we need to see below-potential growth,” Powell said. “I still believe, and my colleagues for the most part I think still believe, that is likely to be true.
