FOMC keeps rates unchanged, but opens door to rate cuts in 2024

Policymakers at the Federal Reserve chose to keep interest rates unchanged for the third straight meeting and hinted at the possibility of monetary loosening in 2024 with inflation slowing more than expected.

The conclusion of the Federal Open Market Committee's two-day meeting in Washington resulted in the federal funds rate staying at the 5.25-5.5% level, as widely expected by markets.

The committee noted that economic activity had "slowed" in the fourth quarter, as shown by recent economic indicators, with job gains moderating and the rate of inflation easing – albeit still "elevated".

As has become customary over recent months, the statement still warned that "any" additional policy firming may be appropriate depending on economic and financial developments.

In the news conference that followed the decision, Fed chair Jerome Powell said: "No one is declaring victory [on inflation]. That would be premature." However, he acknowledged that rate cuts were "clearly [...] a topic of discussion".

Accordingly, the so-called dotplot graph – which shows individual policymakers' expectations each quarter of where they think interest rates will be over the coming few years – shows rates ending 2024 at the 4.625% median average level.

This implies three separate 25 basis-point cuts before the end of next year, compared to just two cuts in September's dotplot.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the FOMC's acknowledgement of an economic slowdown and easing inflation "effectively drops the tightening bias, though without specifically saying 'we’re done'."

He said: "The Fed is catching up with the reality that the credibility of its threats to hike again has been near-zero in markets for some time now."

The dotplot also showed that average forecast points to a further 100bp reduction in 2025 with rates projected to be 3.625% by the end of 2025, with more cuts expected in 2026.

"We’re sticking to our view that the Fed will cut faster than this, with 150bp next year, starting in March or May, and a further 100bp in 2025. Ultimately, policymakers will do what the data tell them to do, and we think inflation will fall faster than they expect," Shepherdson said.