Fed pencils in three rate cuts in 2024, shallower path ahead

After raising the benchmark federal funds rate more than five percentage points starting in March 2022, Fed officials have emphasized they’re in no rush to lower borrowing costs until they are certain inflation is contained.

Powell said higher-than-expected inflation figures at the start of the year didn’t change the broader story that price gains were slowing on a “sometimes-bumpy road.” At the same time, the data didn’t add confidence and policymakers are still seeking greater assurance that inflation is moving closer to the Fed’s 2% goal.

“It’s going to be a bumpy ride,” Powell said. “We’ve consistently said that. Now we have bumps.”

“That is why we are approaching this question carefully,” he added.

Market expectations

While policymakers see the federal funds rate reaching 4.6% by the end of 2024, according to their median rate projection, individuals’ expectations were split. The Fed’s “dot plot” showed 10 officials saw three or more quarter-point cuts this year, while nine anticipated two or fewer.

Fed officials have emphasized the projections are not a predetermined plan, and that the individual forecasts are subject to change based on incoming data for inflation and the labor market. A key measure of consumer prices has risen more than economists expected the past two months, while the U.S. unemployment rate has edged up to a two-year high that officials still regard as low.

Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.

Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.

_____

(With assistance from Chris Middleton, Alex Harris, Vince Golle, Matthew Boesler and Liz Capo McCormick.)

_____