The Federal Reserve left interest rates unchanged after its first policy meeting of 2024, resisting pressure to move toward cutting rates while citing resilience in the US economy. However, the Fed dropped language from its December statement about continuing increases, opening the door for potential rate cuts later this year if growth slows.
Fed Holds Rates Steady But Signals Future Cuts Possible
The Federal Open Market Committee (FOMC) voted unanimously to maintain the federal funds rate in a target range of 4.50-4.75%, avoiding an immediate cut that some investors had bet on earlier. Fed Chair Jerome Powell said in his press conference that the committee sees “good reasons” to expect a soft landing for the economy this year, dampening hopes for cuts any time soon.
“The committee decided to maintain the target range for the federal funds rate at levels that should be sufficiently restrictive to bring inflation down over time,” Powell said.
However, he noted that “the disinflationary process has started” and the Fed will continue monitoring data to determine the appropriate stance of policy. This represented a shift from the December meeting when the Fed telegraphed further rate hikes were imminent.
The tweaked language leaves the door open to rate cuts later this year if inflation and economic data warrant it. Markets are currently pricing in rate cuts beginning as early as June.
Key Takeaways From January FOMC Meeting:
- Rates left unchanged – The Fed held rates at current levels between 4.50-4.75%
- Cuts not imminent – Powell pushed back on expectations for a March cut
- Data dependent path – Future moves will depend on incoming inflation and jobs reports
- Lower peak rate forecast – Projections point to a lower terminal rate around 5%
- Inflation fight not over – Fed vows to keep rates restrictive until inflation is defeated
“We can now say I think for the first time that the disinflationary process has started,” Powell said, while noting it has a “long way to go” to get back to the 2% target.
Fed Economic Projections Still Forecast Growth Slowdown
The latest Summary of Economic Projections (SEP) from Fed policymakers continues to point to a cooldown for the US economy this year. GDP growth is expected to fall to just 1.9% in 2023, down from an estimated 1.9% in 2022, while unemployment is seen ticking up to 4.6%.
| Economic Variable | 2023 Projection |
|---|---|
| GDP Growth | 1.9% |
| Unemployment Rate | 4.6% |
| PCE Inflation | 3.5% |
| Core PCE Inflation | 3.2% |
| Federal Funds Rate | 5.1% |
The projections forecast two more 25 basis point rate hikes this year to a peak fed funds rate of 5.1%, lower than the 5.25% projected in December. Policymakers see rates falling to 4.5% in 2024 and 4.3% in 2025 as inflation and growth moderate.
How Future Data Could Lead To Rate Cuts
While not committing to rate cuts at present, Powell stated “the timing of that and the size of that is going to depend on the incoming data and the evolving outlook.”
The Fed will be closely watching metrics like inflation, consumer spending, the job market, and overall economic growth to determine if and when policy easing is appropriate.
Key data points that could trigger rate cuts later this year:
- Cooling wage growth
- Declining core CPI and PCE inflation
- Jump in unemployment
- Drop off in consumer and business spending
- Financial conditions tightening too much
If the data deteriorates in a way that points to an elevated recession risk, markets expect Fed officials to come off their hawkish stance and move toward cutting interest rates to stave off a downturn.
Market Reaction: Stocks Fall, Rate Cut Bets Retreat
US stocks declined following the Fed’s largely expected decision and Powell’s remarks casting doubt on a March rate cut.
The S&P 500 fell 1.1%, the Dow Jones shed 280 points, and the tech-heavy Nasdaq lost 1% as traders trimmed bets on imminent policy easing.
Shorter-term Treasury yields climbed as expectations for cuts were pared back. The 2-year yield rose 6 basis points to 4.2% while longer-dated 30-year yields were little changed near 3.7%.
The US dollar gained ground against a basket of currencies as some safe haven demand emerged.
Outlook Going Forward – Cuts Still Likely This Year
Despite holding off for now, economists and investors still broadly expect Fed rate cuts before the end of 2023 barring an unlikely jump higher in inflation or surge in growth.
Mohamed El-Erian, chief economic advisor at Allianz, summed up the prevailing market view, tweeting “the issue is not whether there will be cuts but when they start and how big they will be.”
Until clear evidence of a growth downturn emerges, the Fed looks poised to hold at current restrictive levels to maintain pressure on inflation. But eventually easing financial conditions and supporting the economy amid a predicted slump will necessitate policy accommodation.
Markets see about a 70% chance of at least one 25 basis point rate cut by September, according to CME Group’s FedWatch tool. Half-point cuts could also be employed if conditions deteriorate sharply.
For now the Fed is in watchful waiting mode, ready to change course if the data calls for it. But an end to the tightening cycle appears nigh, with cuts likely coming before 2023 is over barring a dramatic improvement in inflation.
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