In a unanimous decision on Wednesday, the Federal Reserve chose to retain its benchmark interest rate within the 5.25% to 5.50% range, reaching a 22-year high. However, the central bank hinted at an upcoming shift in policy, signaling a potential easing next year. This move is in response to efforts by officials to steer inflation back toward the Federal Reserve’s 2% target, even as they leave the door open for the possibility of higher rates.
Notably, officials do not anticipate raising rates over the next year. Instead, they project a 75 basis point reduction in rates in the coming year, an increase of 25 basis points from the initial forecast in September. These projections align with the central bank’s expectation of a decline in inflation to 2.4% next year, revised down from the 2.5% forecast in September, with a further drop to 2.2% projected for 2025.
The Federal Reserve’s benchmark interest rate becomes more restrictive as inflation decreases, placing additional pressure on the economy. Consequently, officials aim to gradually lower rates to avoid applying excessive brakes to economic activity.
While the central bank envisions a substantial rate cut next year, a portion of the policy statement maintains language that allows for potential rate hikes. This strategic ambiguity might serve as a tool for adjusting financial conditions if needed.
The statement released on Wednesday tweaked language to account for potential rate hikes, stating, “In determining the extent to which any additional policy firming may be appropriate … the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Acknowledging progress in addressing inflation, officials altered long-standing language in the statement. Instead of stating that inflation has “eased over the past year but remains elevated,” the updated statement simply acknowledges that inflation is “elevated.”
Officials also acknowledged a slowdown in economic growth since the rapid pace observed in the third quarter. The Federal Reserve now anticipates the economy to grow by 1.4% next year, a slight reduction from the 1.5% forecasted in September.
This policy meeting marks the third consecutive instance in which the central bank has maintained rates at their current levels. Despite the efforts to keep rates steady, Fed officials still foresee the unemployment rate rising to 4.1% next year.
In terms of inflation, a key focus for the Federal Reserve, there are signs of a gradual decline towards the central bank’s 2% target. The core Personal Consumption Expenditures index, excluding volatile food and energy prices, recorded 3.5% for October, down from 3.7% in September and 4.3% in June. The consumer price index, on a core basis, indicated that inflation rose by 4% in November, mirroring the October rate.
In summary, the Federal Reserve’s decision to maintain the benchmark interest rate within the 5.25%-5.50% range underscores the current economic complexities, with the interest rate at a 22-year high, signaling a pivotal moment in monetary policy. The Federal Reserve reiterated that any potential future rate hikes would be contingent on evaluating the impact of prior rate increases on the economy, considering lag effects, and monitoring economic developments.
Source: Yahoo Finance
