Federal Reserve keeps rates unchanged for third meeting; rate hike still an option

LD

The Federal Reserve’s Federal Open Market Committee kept its key policy rate at 5.25%-5.50% on Wednesday, as widely expected, for the third straight meeting, yet still kept the door open for additional firming. Offsetting that, the Fed members indicated they expect more rate cuts next year than they had foreseen in September.

The FOMC statement didn’t soften the language from the previous statement that a further rate hike may be possible. “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in its statement.

The central bankers did signal more rate cuts for next year than they had previously forecast in their Summary of Economic Projections. The median projection for the federal funds rate at the end of 2024 now stands at 4.6%, down from 5.1% in their previous projections.

The central bank continues to shrink its balance sheet, which essentially tightens policy even though the federal funds rate remains unchanged.

Still, the Fed noted that U.S. economic growth appeared to slow from its strong Q3 pace, which is what the policymakers want to see. They’re not explicitly declaring victory against inflation, however. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low,” the FOMC said. “Inflation has eased over the past year, but remains elevated.”

While the Fed’s statement kept its optionality for further tightening, SA Investing Group Leader Ahan Vashi sensed a tone shift that favors a soft landing narrative: “The Fed recognized ongoing moderation in inflation in today’s FOMC statement, which is, in our opinion, akin to declaring victory in the fight against inflation,” he said. “Given Fed’s GDP and unemployment rate projections of 1.4% and 4.1% for 2024, the market is likely to view Fed’s stance as dovish. On the back of this statement, long-duration yields are plunging lower and equities are bouncing up. While things could change after the Fed Chair’s press conference, the latest FOMC statement and summary of economic projections are supportive of the soft landing narrative.”

Indeed, stocks surged after the statement, with the Nasdaq rising 0.8%, the S&P 500 +0.8, and the Dow rising 0.7% in midafternoon trading. Bonds also jumped, with the yield on the 10-year Treasury sinking 14 basis points to 4.07%.

All 12 voting FOMC members voted to keep the rate unchanged, according to its statement.

At 2:00 PM ET, Fed Chair Jerome Powell will discuss the central bank’s decision and economic outlook during his post-meeting press conference.