Fed Signals Three Rate Cuts in 2024, End of Higher Interest Rate Cycle

The Federal Reserve left interest rates unchanged Wednesday but adjusted its projections to include three cuts to interest rates next year from the current 5.25% to 5.5% range.

The Fed acknowledged the economy has slowed from the strong pace of the third quarter while adding that inflation has “eased but remains elevated.”

The move was widely expected and marks an end to the central bank’s round of 11 hikes in interest rates since March 2022, but the focus now will be on how quickly the Fed retreats from what it considers “restrictive” monetary policy.

Markets are pricing even odds for rate cuts beginning by May, though some economists think it could be earlier. The debate centers on whether the Fed is forced to cut because of a deteriorating economy or that inflation is consistently headed toward the Fed’s 2% annual target.

The three rate cuts suggested for next year is a little less than markets had been expecting but more than the Fed has previously indicated. The monetary policy committee’s “dot plot” of individual expectations indicates four more cuts in 2025 and three more in 2026, though longer-range projections tend to be less firm.

“This is a significant change from September when the Fed expected one more hike, and then just two rate cuts from that elevated level in 2024,” said Greg McBride, chief financial analyst at Bankrate. “Collectively, the Fed expects rates to be one-half percentage point lower at the end of next year than was the case just three months ago.”

Additionally, the Fed updated its summary of economic projections, raising the annual growth in gross domestic product to 2.6% this year from 2.1% earlier. GDP for 2024 was lowered slightly to 1.4% from 1.5%, while the unemployment rate is seen rising to 4.1% in 2024 from its present 3.7% rate and continuing at that level in 2025 and 2026.

Inflation, as measured by the Fed’s favored metric, is seen ending 2023 at 2.8%, down from 3.3% in September, while hitting 2.4% in 2024 and 2.1% in 2025 and 2% in 2026. The Fed sets a 2% annual inflation target. The levels through 2025 are generally lower than previously estimated.

The Fed received good news on the inflation front earlier Wednesday when the producer price index came in unchanged for November and is now running at a 0.9% annual pace. That followed Tuesday’s consumer price index report that also showed slowing inflation.

The CPI report prompted EY Chief Economist Gregory Daco to say that “there will be no denying that the disinflationary process has been faster than what Fed officials had been anticipating in early 2023, and that if the progress is sustained, lower inflation and inflation expectations will favor policy recalibration in 2024.”

“We anticipate 100bps of rate cuts next year coming at the May, June, September, and December meetings,” Daco added.

Markets surged following the Fed’s statement, with the Dow Jones Industrial Average rising by 200 points. In recent weeks, both the stock and bond markets have rallied on the belief the Fed is done raising rates for this economic cycle.

“Updated economic projections confirm what markets have come to believe: namely, that multiple rate cuts are in store for 2024,” said Curt Long, chief economist at the National Association of Federal Credit Unions. “NAFCU expects the first cut will occur during the second quarter.”