Fed stands pat; markets jump

Even when the Federal Reserve does nothing it makes news.

After two years of incrementally nearly doubling interest rates to the highest levels in 22 years, the central bankers on Wednesday for the third month in a row decided to stand pat, keeping the Federal Funds Rate at its current level at between 5.25% to 5.5%. That means borrowing costs for things like credit cards, home, car and commercial loans, won’t go any higher for the year. But neither will they go down, as some had hoped.

The Fed, however, hinted that rate cuts are coming so long as it appears inflation is easing. At the same time, in a “on the one hand, on the other hand kind of statement, it kept open the possibility of further raising rates if it doesn’t manage to get inflation under control and achieve its vaunted “soft landing” of dampening inflation without inducing a recession.

Fed: Growth 'has slowed'

“Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter,” the Fed’s Open Market Committee said in its statement released Wednesday afternoon. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

In its accompanying “Summary of Economic Projections,” the OMC pegged the Federal Funds Rate as going to 4.6 to 5.1% next year and to 3.6 to 3.9% in 2025.

In a press conference after the Fed’s announcements Chairman Jerome Powell clearly said officials don’t think they’re going to need to raise rates further, but that committee members aren’t yet ready to “declare victory.”

“You can say that there’s little basis to say the economy is in recession now,” he said. “But it’s always a possibility no matter what the economy is doing. Results are not guaranteed, and the economy could respond in unexpected ways, which it has done recently.”

Investors reacted positively

Investors reacted positively to the Fed news, sending markets spiraling following the Committee’s announcements.

The benchmark S&P 500, the Dow Jones Industrial Average, and the tech-heavy Nasdaq Composite all boosted more than 1% in the after the Fed’s meeting. The Dow briefly reached above 37,000 and was headed for its highest close ever.

Forecasters largely predicted the nation would head into a recession this year or early next, but those prognostications largely haven’t come to fruition.

“The inflation number that people wrote down a year ago has happened the way people expected but in a different setting,” Powell said, noting that the continuing strength of the labor market was not foreseen. “We believe we are likely at or near the peak rate for this cycle. When to dial back on rates is a discussion for a later date.”

Analysts and Fed watchers weren’t surprised by the Fed’s action on Wednesday, but some weren’t as optimistic sounding that rate cuts will occur anytime soon.

“Those hoping for a holiday gift from the Fed in the form of projected rate cuts early in 2024 will find a lump of coal in their stocking,” said Marty Green, Principal at Polunsky Beitel Green, a San Antonio-based law firm specializing in residential mortgages. “The Fed has spent the last half of 2023 trying to dampen expectations that it is about to reverse course and lower rates. It may have been a ‘Bah, humbug’ meeting, but as long as rate increases are a possibility in the coming months, rate reductions are pretty much off the table.”

The Consumer Price Index numbers unexpectedly rose a bit in November, but probably not enough to dampen the Fed’s outlook.

“The Fed will keep one or two rate increase bullets in its holster, ready to use if it sees a trend of inflation reports showing additional increases are necessary to make timely progress to the Fed's 2% target,” Green said.

Cuts not expected soon

Other economists agreed that rate cuts won’t come soon.

“As we head into 2024, we expect the Fed to remain particularly attuned to growth risks as it seeks to achieve a soft landing,” said Thomas Holzheu, Swiss Re’s Chief Economist Americas. “However, persistent underlying strength in inflation is likely to delay the start of the easing cycle until well into next year.”

Holzheu said he expects a material slowing in U.S. economic growth to 1.1%, in keeping with the Fed’s projections, after a 2.4% expansion in 2023.

“We expect peak policy interest rates will weigh on economic activity more acutely in the months ahead, particularly as a softening labor market weighs on consumer confidence and spending behavior,” he said. “Corporate profit margins will also be increasingly pressured by lower nominal growth, resulting in more cautious hiring behavior and reduced investment.”
Like others, Holzheu does not see a recession in the making, but risks remain elevated as long as policy rates remain in “restrictive territory.”

“This risk is exacerbated by ongoing economic stagnation in Europe and structural growth risks in China,” he said.” “We look for the 10-year Treasury yield to remain largely unchanged at 4.2% over the course of 2024.”

Powell said that the notion rate cuts might come doesn’t mean that the path of the economy is necessarily looking weaker.

“It could just be a sign that the economy is normalizing and doesn’t need the tight policy,” he said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].