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In a pivotal move reflecting a shift in economic strategy, the Federal Reserve announced on Wednesday its decision to maintain current interest rates, indicating the conclusion of a two-year period of tightening U.S. monetary policy. The released economic projections subtly suggest an impending reduction in borrowing costs for the year 2024.

Acknowledging a notable easing of inflation over the past year, the updated policy statement underscores a prudent approach. Federal Reserve officials, expressing a departure from a previous inclination towards additional rate hikes, now adopt a watchful stance on the economy.

A significant majority, comprising 17 out of 19 Fed officials, project a lower policy rate by the end of 2024. The median projection indicates a decline of three-quarters of a percentage point from the current 5.25%-5.50% range, and notably, no officials anticipate a rate increase by the close of the next year.

This nuanced change in tone reflects the Federal Reserve’s measured response to the challenges posed by last year’s inflation spike.

Headline personal consumption expenditures inflation is anticipated to ease to 2.8% by the end of 2023, with a further decline to 2.4% in 2024, approaching the Fed’s 2% target. Concurrently, the unemployment rate is expected to see a marginal rise from 3.7% to 4.1%, maintaining the rate forecasted in September. Economic growth is projected to decelerate from 2.6% this year to 1.4% in 2024.

While the option to raise the benchmark overnight interest rate remains, the recent trend in inflation suggests an increasing likelihood that such a move may not be necessary.

The economic projections align with the U.S. central bankers’ favored “soft landing” scenario, envisioning a gradual slowdown in inflation without triggering a recession or a sharp rise in unemployment.

In anticipation of this policy shift, investors had already positioned bets on the central bank cutting its policy rate by a full percentage point by the end of next year, aligning with the new projections.

Fed Chair Jerome Powell is scheduled to provide further insights in a press conference at 2:30 p.m. EST (1930 GMT). Since implementing a series of rate hikes since March 2022, the central bank has maintained the policy rate since July, as inflation approaches its target.
By: Montel Kamau
Serrari Financial Analyst
13th December, 2023

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