Volkswacht Bodensee - US Fed holds rate steady and signals three cuts ahead

The Fed's decision to keep its key lending rate between 5.25 percent and 5.50 percent lets policymakers determine "the extent of any additional policy firming that may be appropriate," the US central bank said in a statement.

The inclusion of the word "any", which was absent in November's decision, is likely to further dampen lingering expectations of interest rate hikes ahead -- and fuel traders' hopes of cuts.

Lower interest rates make borrowing cheaper, and help to encourage consumer spending, which is good news for company earnings.

The widely expected decision keeps interest rates high as the Fed continues its fight to slow inflation towards its long-term target of two percent amid a recent flurry of positive economic news.

The Fed, which has a dual mandate to tackle both inflation and unemployment, is the first major central bank to unveil its interest rate decision this week.

The European Central Bank (ECB) and the Bank of England will publish their own rate decisions on Thursday, and are also expected to hold their key lending rates steady in the face of slowing inflation.

- Soft landing in sight -

Despite the Fed's aggressive policy of monetary tightening, the world's biggest economy grew at an annualized rate of 5.2 percent in the third quarter of this year.

Meanwhile, headline consumer inflation in the United States fell further last month, according to fresh data published Tuesday, while the unemployment rate has remained close to historic lows.

The data suggest the Fed is on track for a so-called "soft landing," a rare feat in monetary policy when high interest rates bring down inflation without plunging the country into a damaging recession.

Speaking ahead of the decision, US Treasury Secretary Janet Yellen welcomed the Fed's recent progress against inflation, and said she expects the rate of price increases to fall below three percent next year.

"My baseline is that we'll achieve a soft landing," Yellen, a former Fed Chair, told CNBC in an interview.

"Monetary policy is an art and not exactly a science yet, and it requires skill and a good dose of luck to get that exactly right," she said.

- Rate cuts ahead -

Alongside its interest rate decision, the Fed's rate-setting Federal Open Market Committee (FOMC) also published updated economic forecasts.

The FOMC now expects the economy to grow by 2.6 percent this year, up from 2.1 percent in September, before slowing down to 1.4 percent in 2024.

Headline inflation is expected to slow more than previously expected to 2.8 percent this year, before easing to 2.4 percent in 2024.

Meantime, the Fed's favored measure of inflation, stripping out volatile food and energy costs, is now expected to reach 3.2 percent this year, and 2.4 percent next year, while the unemployment rate remains unchanged from the September forecast.

Members of the rate-setting Federal Open Market Committee (FOMC) also cut the median projection for interest rates at the end of next year to the midpoint between 4.50 and 4.75, signaling they now expect 0.75 percentage points of cuts.

At 25 basis points per cut, this would translate to three rate cuts next year -- one more than most analysts were predicting going into the meeting.

Before the Fed's decision, financial markets were pricing in around 1.25 percentage points of rate cuts next year, starting in March, according to EY Chief Economist Gregory Daco.

Fed Chair Jerome Powell is due to speak to reporters later Wednesday, and could provide further clarity on what the Fed expects to unfold in the months ahead.

C.Bruderer--VB