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Fed likely to hold rates steady and possibly signal small decline in 2024

On Dec 13, 2023

The Federal Reserve is widely expected to keep interest rates unchanged for a third consecutive time.

However, there is an anticipation that the central bank will signal a cautious approach to any future monetary policy easing, considering the bumpy progress of inflation downward.

Despite the expected status quo in interest rates, the quarterly economic projections are likely to indicate the possibility of at least a couple of rate cuts by the end of the following year. The intention is to find a balance between restrictive policies that slow spending and hiring without causing a sharp economic downturn.

The Federal Reserve Chair, Jerome Powell, is expected to emphasize in a press conference that any potential rate cuts will be contingent on further improvement in inflation. Despite a significant decline in inflation this year, it remains above the Fed’s 2% target.

The economy has shown signs of normalization, with inflation by the Fed’s preferred measure dropping to 3%, down from its peak of over 7% in the summer of the previous year.

The unemployment rate has also fallen to 3.7%, close to the level when the Fed began raising interest rates in March 2022.

Chief Powell is expected to navigate a fine line in his communication, acknowledging the progress in economic normalization while pushing back against the idea of early rate cuts. There might even be a warning that the Fed could consider raising rates again if necessary.

Recent economic data, such as the unexpected rise in consumer prices and higher underlying inflation in November, pose challenges to the narrative of a smooth downward trend in inflation. However, producer prices being unchanged in November provided some positive news.

While economists expect the Fed to maintain the current interest rate range until at least July, financial markets are pricing in a different scenario, with expectations of a full percentage point reduction starting in May.

The Federal Reserve appears to be treading cautiously, considering the complex dynamics of inflation, economic normalization, and the potential need for future policy adjustments. The central bank aims to strike a delicate balance in its communication to guide market expectations.