Fed holds US interest rates at 22-year high but signals cuts in 2024

Officials at the Federal Reserve expect to cut interest rates three times next year as US inflation continues to fade from its highest level in a generation.

Policymakers opted to hold rates steady at a 22-year high at their latest meeting, as expected, while they scrutinize the impact of their campaign to bring down price growth.

But projection materials released alongside the Fed’s announcement revealed that most members of its rate-setting open market committee had penciled in three rates cuts for the coming year.

America’s central bank is closely monitoring the strength of the world’s largest economy, which has remained unexpectedly resilient in the face of the fastest string of rate increases in four decades. Almost 200,000 jobs were added in the labor market last month alone.

Inflation has weakened. The consumer price index, which peaked above 9% in June 2022, rose by 3.1% in November, according to official data released on Tuesday. But many Americans are still grappling with the heightened cost of living, and price growth remains above the Fed’s 2% target.

Officials at the Fed convened for their latest policy meeting on Tuesday. They embarked upon an aggressive battle against inflation in March last year, but last ordered a hike in July, and have since opted to wait and see whether they have done enough.

In a statement, the Fed’s rate-setting open market committee announced on Wednesday that the benchmark federal funds rate would stay between 5.25% and 5.5%.

“Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter,” the committee said. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

The economic projections revealed that members of the committee expect economic growth to slow from 2.6% this year to 1.4% next, and for unemployment to rise from 3.8% to 4.1%.

They expect the personal consumption expenditures price index – the Fed’s favored measure of inflation – to slip from 2.8% in 2023 to 2.4% in 2024, before hitting 2.1% in 2025.

With less than year to go before the presidential election, the Biden administration is trying to make the case for its economic record to voters. Earlier this week Lael Brainard, director of the national economic council, and former Fed vice-chair, acknowledged there remains “more work to do” to lower costs for consumers, with “many Americans” still facing challenges.

But in a memo distributed by the White House, Brainard described economic growth over the past year as “strong” while inflation declined. “Supply chains have been rebuilt, and productivity is up,” she wrote. “American workers are finishing the year in a stronger position than before the pandemic – with wages and wealth up by more than inflation and strong employment, thanks in part to the President’s Bidenomics agenda.”