End of one era, beginning of another, points out the Federal Reserve. Expect a new increase before the end of the year to see cuts on the horizon.
The Fed has closed a very intense year in the fight against persistent inflation with the decision to leave interest rates as they are and points to a paradigm shift with possible cuts in the near future, around three in 2024.
The December meeting concluded with the third consecutive pause since July, having raised rates 11 times since March 2022. This tight policy keeps the money price in the range of 5.25%-5 .50%, the highest level in 22 years.
The Dow Jones soared 512 points (1.4%) once the decision was announced and closed at the ceiling of 37,000 points, setting a new record.
The Central Bank of the United States certified that inflation is cooling, with a rise in November of 3.1% compared to last year, and a drop compared to October, although its chairman, Jerome Powell , stressed that it remains high, above the 2% set by the Fed.
He also noted that recent indicators show that growth in economic activity has slowed compared to the strong growth in the third quarter. In an update to projections, the Federal Reserve raises this year’s GDP to 2.6% from the September forecast (2.1%), but lowers it to 1.4% in 2024 compared to the previous 1.5%.
In addition, job creation has moderated compared to the beginning of the year, but remains strong and unemployment remains low. In its projection, unemployment remains at 3.8% for this year and at 4.1% in 2024. Inflation would remain at 2.8%, below the 3.3% predicted in September .
In this context, all analysts assumed that the Fed would neither raise rates nor lower them. But this last option is the one that aroused the most interest among experts and investors.
The challenge was to be able to find out when the Federal Reserve will start cutting interest rates that have made lending conditions very expensive, affecting the pockets of citizens and, above all, small businesses.
At the press conference, Powell did not specify, but the wording of the Fed’s statement and his own words indicated that cuts are the new phase. “We are at the beginning of this discussion”, he replied. “We are aware of the risk of keeping rates high for a long time,” he said in another reply.
From his usual cautious perspective, Powell welcomed the reduction in inflation, which was better than expected in September. He also clarified that they have seen a clear improvement in underlying inflation.
He warned, however, that they have not yet concluded the task, although, in another proof of the possible turn, he indicated that “our restrictive policy of interest rates is close to the peak”.
Like other Fed officials, Powell expressed doubts about declaring “mission accomplished” and even remarked that they have not yet ruled out a rate hike, because this inflation is “not the classic” compared to others faced previously.
But from his words emerged the idea that this situation seems remote in view of a drop in inflation more quickly than predicted months ago. However, both Powell and his colleagues are reluctant to set a timetable. “Meeting after meeting”, he said.
The chairman of the Federal Reserve stated that there is no element to think about a recession now. Everything points to a soft landing after the restrictive policy. But he clarified that “recession is a possibility next year, given how unusual the situation is”.