Volkswacht Bodensee - US Fed holds key rate steady, signals three cuts likely in 2024

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, was added as "an acknowledgement that we believe that we are likely at or near the peak rate for this cycle," Fed Chair Jerome Powell told reporters.

He added that policymakers had discussed when it would be "appropriate" for the Fed to begin cutting interest rates, while refusing to rule out another hike if the situation unexpectedly deteriorates.

"We are prepared to tighten policy further if appropriate," he said.

All three major stock indexes on Wall Street rose following publication of the Fed's rate decision and economic projections.

The decision signals the Fed is keeping up 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 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 2023.

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.

"My baseline is that we'll achieve a soft landing," Yellen, herself 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 lending rate decision, the Fed's rate-setting Federal Open Market Committee also updated its economic forecasts.

FOMC members cut the median projection for interest rates at the end of next year to the midpoint between 4.50 and 4.75 percent, 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.

The FOMC now expects the US 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 ease more than previously expected to 2.8 percent this year, and drop to 2.4 percent in 2024.

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

H.Gerber--VB