While Wall Street looks for clues on rates, it is also bracing itself for this year’s final meeting of the policy-setting Federal Open Market Committee (FOMC) that concludes on Wednesday. The Federal Reserve is almost certain to hold interest rates steady. But aside from a likely unremarkable meeting conclusion, analysts believe that the Fed is done raising interest rates and could be readying to consider rate cuts next year, maybe as early as the first half of 2024.
“At the December FOMC meeting, we expect the Fed to stay on hold and maintain the target range for the federal funds rate at 5.25–5.5percent. Incoming data since the November meeting, in our view, do not support another rate hike, and the Fed’s mantra of ‘wait and see’ and wanting to be ‘careful’ when assessing policy rate adjustments suggests that it is not convinced that a change in the current policy stance is warranted,” noted Bank of America Securities in a client note, accessed by The Epoch Times. “But we think that a cooling economy is more likely and that the narrative should shift in the direction of cuts over hikes in 2024.”
If that happens, it would be the third consecutive hold, implying that rather than the FOMC just raising at a slower pace, the fed funds rate has most likely reached its peak for this cycle. The core inflation (or personal consumption expenditure) has fallen to a near two-and-a-half year low of 3.5 percent year over year, indicating that inflation has made headway toward the FOMC’s 2 percent target, said analysts.
Most new information since the November meeting has shown a slowdown in economic activity, disinflation, and a shrinking job market, according to BofA Securities, which signals that the Fed’s present policy stance of staying put is both suitable and restrictive enough.
U.S. economic activity is cooling as higher interest rates constrained demand, according to a poll by the Institute for Supply Management earlier this month, which revealed no change to last month’s manufacturing Purchasing Managers’ Index (PMI), which remained at 46.7. The PMI remained below 50 for the thirteenth month in a row, indicating a decline in manufacturing. After August 2000 and January 2002, that was the longest such span.
However, the majority of economists think the Fed can pull off the desired “soft landing” and that 2024 will not bring a hard recession.
If that’s the case, the Federal Reserve’s next moves won’t be so much about whether or not to further firm policy rates but rather policymakers will be concerned with how long to keep its current position, BofA Securities noted.
That aside, according to Jeremy Siegel, senior economist at fund adviser WisdomTree, fed funds futures do not reflect any hikes this December, either, and are starting to price in significant cuts for next year.
Fed funds futures are financial contracts that represent market opinion of where the daily official federal funds rate will be at the time of the contract expiry.
Economic Projections Key
The Fed maintained rates at 5.25–5.50 percent at the most recent FOMC meeting, which was issued on Nov. 1, 2023. That decision continued the pause from the aggressive rate-hiking campaign that started in March 2022 to combat increasing inflation.The majority of policymakers believed that raising interest rates was essential to gradually reduce inflation to the 2 percent objective; thus, as Fed Chair Powell hinted, some feared that the Fed may hike rates again this year. But the string of past rates hikes impacted various sectors of the economy, making loans more expensive for consumers and businesses, leading to a decline in sales and prices including that of cars, homes, furniture, and many other consumer products,
The decision to be made at the December meeting would, hence, be contingent upon the incoming data, say analysts
“The U.S. labor market continues to slow after booming in 2021 and 2022 when America reopened from the pandemic. Similarly, in the United States, personal consumption expenditure prices have clearly peaked after the Fed started increasing interest rates aggressively during 2022 and 2023. The easing labor market and falling inflation make a strong case for the Fed to keep its fed funds rate unchanged,” stated a Bank of Singapore (BoS) client note, accessed by The Epoch Times.
BoS analysts add that the improving job market and declining inflation clear the air to begin decreasing rates, the timing of which will depend on FOMC’s updated predictions—called the Summary of Economic Projections (SEP)—and Chairman Powell’s remarks.
However, BoS also anticipates that the FOMC will play down the chances of early rate decreases in 2024, but the committee will also eliminate any predictions of future rate hikes in their updated estimates, leaving only cuts for 2024 and 2025.
The bank expects cuts of 25 basis points (0.25 percent) in each of June, September, and December, which will benefit risk assets in 2024, according to its analysts.
A Dovish Fed
Overall analysts expect that at the end of the Wednesday meeting the Fed will take the first moves toward shifting its communication from hawkish to dovish, given that the present softening of the U.S. economy does not render hawkish opinions justifiable“We think that the committee can take the initial step of making its policy rate outlook more balanced and language flexible enough to keep both cuts and hikes on the table, while opening the door more concretely to cuts would be a first step in the direction of dovish holds, ” concluded BofA Securities.
