The federal funds rate once again will not budge following
the final meeting of the year for the Federal Open Market Committee (FOMC). The
committee also indicated cuts could be forthcoming in 2024 and 2025 as it
continues to strive toward the eventual target rate of 2 percent.
FOMC members voted unanimously to keep the benchmark
borrowing rate steady between 5¼-5½ percent, noting an easing of inflation as a
positive sign contributing to their decision.
“Recent indicators suggest that growth in economic activity
has slowed substantially from the outsized pace seen in the third quarter,” Fed
Chair Jerome Powell said in a news conference. “Even so, GDP (gross domestic
product) is on track to expand around 2.5 percent for the year as a whole.”
Powell also noted it is “very good news” that the decrease
in inflation has come without a significant increase in unemployment and that
officials “do not view it as likely to be appropriate to raise interest rates
further, neither do they want to take the possibility off the table.”
Forward-looking predictions offered by the FOMC members,
spanning from 2023 to 2026 and beyond, encompassed crucial economic indicators
such as real GDP growth, the unemployment rate and inflation levels, the
Federal Reserve noted in a summary on its website. Each of the forecasts relied
on contemporary data available during the meeting, interwoven with their
nuanced evaluations of the appropriate monetary policy.
The core of these assessments revolved around crafting a
trajectory for the federal funds rate, its enduring value and presumptions
regarding other contributing factors influencing economic outcomes.
“The longer-run projections represent each participant’s
assessment of the value to which each variable would be expected to converge,
over time, under appropriate monetary policy and in the absence of further
shocks to the economy,” the summary states.
The concept of “appropriate monetary policy” encapsulates
each participant’s view on the future course of policies most likely to drive
economic activity and inflation in alignment with their interpretation of the
mandate to optimize employment and price stability.
“The committee would be prepared to adjust the stance of
monetary policy as appropriate if risks emerge that could impede the attainment
of the committee’s goals,” the FOMC said in a press release. “The committee’s
assessments will take into account a wide range of information, including
readings on labor market conditions, inflation pressures and inflation
expectations, and financial and international developments.”
Experts cite the FOMC’s “dot plot” of individual
members’ projections as indicating three rate cuts are likely in 2024 and
four more anticipated in 2025. CNBC noted that three additional rate reductions
in 2026 would take the rate down close to the committee’s long-run outlook of
between 2-2¼ percent, but also pointed out “considerable dispersion in the
estimates for the final two years.”
In addition to maintaining the current federal funds rate,
the FOMC directed the Fed’s trading desk to:
·
“Conduct standing overnight repurchase agreement
operations with a minimum bid rate of 5.5 percent and with an aggregate
operation limit of $500 billion.
·
“Conduct standing overnight reverse repurchase
agreement operations at an offering rate of 5.3 percent and with a
per-counterparty limit of $160 billion per day.
·
“Roll over at auction the amount of principal
payments from the Federal Reserve’s holdings of Treasury securities maturing in
each calendar month that exceeds a cap of $60 billion per month. Redeem
Treasury coupon securities up to this monthly cap and Treasury bills to the
extent that coupon principal payments are less than the monthly cap.
·
“Reinvest into agency mortgage-backed securities
(MBS) the amount of principal payments from the Federal Reserve’s holdings of
agency debt and agency MBS received in each calendar month that exceeds a cap
of $35 billion per month.
·
“Allow modest deviations from stated amounts for
reinvestments, if needed for operational reasons.
·
“Engage in dollar roll and coupon swap
transactions as necessary to facilitate settlement of the Federal Reserve's
agency MBS transactions.”