Updated at 2:39 PM EST
The Federal Reserve made its first indication of 2024 rate cuts Wednesday as it released fresh growth and inflation forecasts that see a weaker economy and slowing inflation.
Watch Federal Reserve Chairman Jerome Powell’s live comments below:
The Federal Open Market Committee held its key policy rate at between 5.25% and 5.5%, the highest in 22 years, a move that was widely expected by Wall Street following the last quarter-point rate hike in July.
However, the Fed’s new Summary of Economic projections, known as the dot plots, now suggests the federal funds rate will fall by 0.75 point next year, a sharp pivot from recent comments that had indicated a “higher-for-longer” stance.
Fed officials see core PCE prices, its preferred inflation gauge, ending the year at 2.8% before easing to 2.4% in 2024, with GDP growth falling to 1.4% after ending this year at 2.6%. Headline unemployment, Fed officials forecast, will rise to around 4.1% by the end of next year.
“It seems like the Fed has just endorsed the market’s view that the direction of travel for rates is downwards, although not quite the magnitude of cuts next year,” said Seema Shah, Chief Global Strategist, Principal Asset Management. “In the space of just three months, the FOMC has delivered a significant about-turn – a pivot if you wish – from emphasizing higher for longer to, now, higher for shorter.”
“Certainly, if growth is slowing and inflation is also heading back to target, a few rate cuts will make sense, albeit not quite as much as the five that the market is currently anticipating,” she added. “For five to make sense, the economy really needs to stumble and the Fed needs to panic.”
U.S. stocks extended earlier gains immediately following the Fed decision and ahead of Chairman Jerome Powell’s question-and-answer session with the media. The S&P 500 was marked 42 points higher, or 0.92%, on the session while the Dow Jones Industrial Average was up 315 points. The tech-focused Nasdaq was marked 137 points, or 0.95%, higher.
Benchmark 10-year Treasury note yields fell 8 basis points (0.08 percentage point) to 4.067% following the interest rate decision while 2-year notes eased 15 basis points to 4.516%.
The U.S. dollar index, meanwhile, gave back most of its gains from earlier in the session and was last marked 0.70% lower at 103.135 against a basket of six global currency peers.
CME Group’s FedWatch is starting to reflect that change, with the odds of a March cut now pegged at 58.2%, with the odds of a follow-on cut in May now trading at 42.2%
The most optimistic reading for 2024 rate cuts, meanwhile, puts the year-end federal-funds rate at between 4% and 4.25%, effectively adding one quarter-point reduction from the Fed’s forecasts.
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