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Fed Keeps Interest Rate Unchanged at 22-Year High But Signals Cuts Next Year

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Key Takeaways

  • As widely expected, the Federal Reserve held the central bank's influential fed funds rate steady on Wednesday.
  • The rate is currently at a 22-year high, where it's been since July, putting upward pressure on all kinds of loans including credit cards, car loans, and mortgages.
  • Economic projections showed that Fed officials anticipate planning to cut the fed funds rate by 0.75 percentage point next year, compared to the 1.25-percentage-point drop that markets expect.

In a major shift, the Federal Reserve signaled that its campaign of anti-inflation rate hikes is likely over.

The Federal Reserve on Wednesday held its key interest rate where it’s been since July, at its highest since 2001. The widely expected decision of the Federal Open Market Committee (FOMC) keeps the fed funds rate in a range of 5.25% to 5.5%. In contrast to past communications, Fed officials also indicated they don't expect to raise the rate any higher in their efforts to reduce inflation to a 2% annual rate.

"While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress towards our 2% inflation objective is not assured," Federal Reserve chair Jerome Powell said at a press conference after the announcement.

The three major U.S. stock indexes rose on the Fed announcement.

The fed funds rate influences interest rates on loans throughout the economy, and the Fed’s 11 rate hikes over the past year and a half are aimed at curbing inflation by keeping borrowing costs high, slowing the economy enough, but not so much that it causes a recession. 

The hikes have had the intended effect of pushing up borrowing costs for consumers and businesses; for instance, making formerly cheap home loans a financially painful prospect that few buyers can afford.

Inflation has fallen significantly in recent months, despite a report this week showing that inflation only got slightly cooler in November. That’s caused interest rates on some loans, including mortgages, to fall since late October because of traders anticipating the Fed changing course and beginning to lower interest rates as soon as March 2024.

The Fed’s official statement Wednesday gave little hint of the timing of potential rate cuts, and repeated language from previous statements emphasizing that the Fed is ready to raise rates again if consumer prices start rising rapidly again, although it did add a acknowledgements that "the growth of economic activity has slowed" since the third quarter and "Inflation has eased over the past year."|

Powell said FOMC members had discussed when to start cutting rates. That was a change from earlier this month, when he said such discussions would be "premature."

Still, FOMC members wanted to acknowledge that no further hikes are currently expected, but "didn't want to take the possibility of further hikes off the table," Powell said.

Economic projections by Fed policymakers released Wednesday showed that officials anticipate planning to cut the fed funds rate by 0.75 percentage point next year, compared to the 1.25-percentage-point drop that markets expect, according to the CME Group’s FedWatch tool, which forecasts monetary policy moves based on fed funds futures trading data. The last time the Fed made its quarterly projections in September, the median prediction was for only 0.25 percentage points of rate cuts.

Fed officials had pushed back against talk of rate cuts because expectations for them could fuel rising stock prices—which could, in turn, stoke inflation. The Fed's dropping its expectations of further rate hikes brings the central bank's official position more into line with the positioning of financial market participants. For months, markets have priced in little if any chance of another hike.

"The Fed is catching up with the reality that the credibility of its threats to hike again has been near-zero in markets for some time now," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary.

The Fed's new stance could bring some relief to would-be homebuyers waiting for mortgage rates to fall.

"This is good news for the housing and mortgage markets," Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement. "We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market."

The Fed's signaling rate cuts has implications for borrowers as well as savers. This year, depositors have been offered the highest returns in decades on certificates of deposit and high-yield savings accounts, but those days may be coming to an end.

"The Fed virtually made it official that there’ll be no more rate hikes this cycle," Robert Frick, corporate economist with Navy Federal Credit Union, said in a statement.
"That’s a call to action for savers to lock in current high CD rates and other rates in safe vehicles such as treasuries. Those rates will likely only drop from here, and given they’re higher than the rate of inflation, savers can earn real returns for now."

Update—This article has been updated to include comments from Fed Chairman Powell's press conference, economic projections from the Fed and comments from analysts.

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