Fed Signals End of Tightening Cycle, Eyes Rate Cuts in 2024
In their final meeting of 2023, the Federal Open Market Committee (FOMC) unanimously voted to keep interest rates unchanged at 5.25-5.50% but made dovish changes in their policy statement, indicating an end to the tightening cycle.
The revised dot plot forecasts a lower path for the federal funds rate, with a decrease to 4.6% in 2024 (from 5.1% previously) and to 3.6% in 2025 (from 3.9%). This suggests a total of 175 basis points of cuts over the next two years, more than previously anticipated.
Fed Chair Powell's comments were in line with the dovish tone, indicating no further rate hikes and a focus on the timing of future rate cuts. He suggested that rate cuts could start before core inflation reaches the 2% target, potentially as early as March 2024.
The market responded positively, with Treasury yields falling, the S&P 500 rallying, and the US dollar weakening. Fed funds futures now indicate a higher likelihood of rate cuts in 2024.
The FOMC's stance and projections reflect a strong belief in a "soft landing" scenario, where the economy slows down without significant negative impacts.
Source: Helios Quantitative Research, Bloomberg, Federal Reserve