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At the current meeting, the Fed decided to keep rates at the same level for the third time in a row, which is in line with market expectations. In his commentary, he took into account indicators indicating a slowdown in economic growth as well as a delay in the transfer of higher rates to the economy. Bankers now expect it to cut rates by 75 bps next year. In response to the announcement of the decision and the comments issued, bond yields fell while the S&P 500 rose.

The Fed unanimously decided to keep interest rates in the current range of 5.25-5.50%, which is the highest since 2001. At the same time, according to the median of FOMC participants, they expect a rate cut of 75 bps next year, i.e. a sharper cut than the September forecast . So the median for rates at the end of 2024 is 4.6%, but bankers’ expectations vary widely – 8 of them expect less than 3 25bps cuts next year, 5 of them expect more. According to the median, the amount of rates in 2025 is expected to be 3.6%. Markets expect the Fed to start cutting rates as early as March 2024 for a total of 125 basis points next year.

A certain change in rhetoric is evident in the commentary on the Fed’s decision. Bankers acknowledged that inflation “has moderated over the past year, although it remains high.” Moreover, the majority of Committee participants now perceive the risk of price increases as balanced. The Fed confirmed that recent indicators suggest growth in economic activity has slowed from its strong pace in the third quarter, job growth has moderated and inflation has moderated over the past year. “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, employment and inflation,” the Fed Committee said in a commentary, noting that it also took into account the delay in the cumulative tightening of monetary policy.

The updated economic outlook includes downward revisions to inflation for both this year and next. It now estimates inflation excluding food and energy prices at 2.4% in 2024. There was also a slightly downward revision of GDP growth next year, unemployment expectations remained unchanged.

At a press conference, Fed Chairman Jerome Powell emphasized that the outlook is not a set plan and that the Fed may move to raise rates further at any time if necessary given the evolution of price pressures. Nevertheless, he admitted that the question of when the rate reduction will begin was discussed. “It’s starting to play into our outlook and it’s a clear topic of discussion both globally and at our meeting today,” he said.

Bond yields fell immediately after the announcement. The U.S. 2-year Treasury yield fell more than 20 bps to 4.53%. Stocks responded immediately higher, with the S&P 500 adding 0.25%.

Goldman Sachs adjusted its outlook following yesterday’s decision and the Fed’s rhetoric. He is now counting on faster and sharper rate cuts – three cuts of 25 bps in March, May and June 2024 and a gradual reaching of the level of 3.25-3.5% from the previous 5.25-5.5%.

Source: Bloomberg, Fed

2023-12-14 07:37:00
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