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“People generally think that we’re at or near [the final level], and think it’s not likely that we will hike,” Fed Chair Jerome H. Powell said, referring to his fellow officials. “They don’t take that possibility off the table.”
The interest rate announcement was expected, on the heels of encouraging economic data on inflation, the job market, wages and consumer spending. Since late summer, Fed officials have stopped doling out rate hikes, instead waiting to see how the economy responds to their moves so far. The result: Inflation keeps coming down without triggering hazards for the job market or financial stability. And barring any surprises, that’s all expected to continue.
Markets popped on hopes that borrowing costs would come down in the near future, and major indexes continued climbing through the afternoon. At the close, the Dow Jones Industrial Average jumped 512.3 points, or 1.4 percent, to a record high of 37,090.24. The S&P 500 index climbed 1.37 percent, and the Nasdaq 1.38 percent.
Policymakers closed out the year with a fresh crop of economic projections, outlining their expectations for rates, inflation, the unemployment rate and overall growth. Those estimates showed three rate cuts in 2024. Officials stuck to previous estimates that the unemployment rate would rise slightly next year, to 4.1 percent. And they showed inflation improving over the coming 12 months but not quite reaching the desired 2 percent target.
Ultimately, Powell cast the economy as one that defied expectations for the better this year. Powell said that “there’s little basis for thinking that the economy is in a recession now.” But he was quick to add his typical disclaimer that it is too soon to declare victory, because the economy has surprised just about everyone time and again.
“We kind of assume that it will get harder from here,” Powell said of the ongoing inflation fight. “But so far it hasn’t.”
Wednesday’s decision leaves the Fed’s benchmark interest rate, known as the federal funds rate, between 5.25 and 5.5 percent. That’s the highest level in 22 years, and it’s set at a point intended to slow all kinds of borrowing and investment, from mortgages and auto loans to business hiring.
Now the Fed’s plan is to keep rates high for as long as it takes to snuff out the remaining sources of inflation. The idea is that high borrowing costs will keep a tight grip on the economy, even if officials have moved past the hiking phase.
Barring emergencies like the pandemic or surging inflation, the Fed normally hikes or cuts rates in quarter-point increments. And it’s not yet clear how long rates will stay at their current level before they start to come down. Some Fed watchers are eyeing the central bank’s March meeting as a possibility for the first cut.
But Claudia Sahm, founder of Sahm Consulting and a former Fed economist, noted that the Fed’s messaging moves slowly and deliberately; minor shifts in policy can take weeks, if not months, to emit through speeches and public remarks. Even once officials are certain they won’t raise rates again, it will take time for Powell and his colleagues to change their tune. That could push the first cut into late spring or early summer.
“He’s like, ‘We need to see progress towards 2 percent,’” Sahm said. “And it’s like, ‘Look around. You’ve got progress toward 2 percent.’”
Powell held back from describing what exactly it will take for rates to come down. But he acknowledged “there’s a general expectation that this will be a topic for us looking ahead.”
One certainty is that officials will have to be sure inflation is on track to meet the more normal 2 percent target. (Inflation is currently at 3 percent, using the Fed’s preferred gauge.) There’s been serious progress in that direction. Overall inflation has come down from a summer 2022 peak, with the consumer price index rising 3.1 percent in November, compared with the year before. On Wednesday morning, fresh data from the Labor Department showed wholesale prices were flat in November, providing an even sunnier spin on the inflation outlook.
Demand is slowing, too. Higher rates mean businesses are having have a harder time getting loans. And though the job market is still tight, it’s no longer growing like gangbusters.
At the same time, many parts of the economy haven’t experienced much of a dip at all. Typically, high mortgage rates zap demand for housing, because a few extra percentage points on a loan can price shoppers out of their search. But because there are so few homes available, a housing downturn from earlier this year was short-lived, and home prices are climbing once again.
By now, economists would have also expected consumers to pull back on spending, either because of high inflation, high interest rates or uncertainty about what’s to come. But Americans are continuing to spend big on concerts, vacations, movies and more, helping propel the labor market and overall economic growth.
The open question is how long that momentum can stick around. Fed officials still say their inflation fight will require some softening in the labor market, plus a pullback in consumer spending. To what extent? No one knows.
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