No rate change, although cuts are anticipated for 2024
After November’s inflation came in at an annual rate of 3.1%, in line with expectations and representing a slight deceleration compared to the 3.2% recorded in October, and following the release of employment numbers, which generally indicated a strong labor market (adding +199,000 new jobs with an unemployment rate of 3.7%), the Federal Reserve (FED) made the unanimous and widely anticipated decision to keep the target range for the federal funds rate unchanged at 5.25% – 5.50%, marking the highest level in the last 22 years. This meeting represents the third consecutive occasion in which the FED opted to keep the reference rate unchanged. The statement noted that employment generation has moderated since the beginning of the year, although it remains strong, and the unemployment rate has remained low. Meanwhile, inflation has declined over the past year but remains elevated.
As mentioned in recent meetings, the statement reaffirmed that, in determining the degree of additional monetary policy tightening to eventually bring inflation back to 2%, the Committee will take into account all implemented measures, the lags with which monetary policy impacts economic activity and inflation, and the development of economic and financial factors. Therefore, the Committee will continue to evaluate additional information as it emerges and its implications.
On the other hand, the FED updated its macroeconomic expectations shared in September. In detail, an upward adjustment in the growth forecast for this year to 2.6% from 2.1% was observed. For 2024, the estimate points to an expansion of 1.4%, implying a slight reduction. The new projections for the labor market remain unchanged, with the unemployment rate closing the year at 3.8% and rising to 4.1% in 2024. Another significant point in the statement is the expectation for the federal funds rate to end this year at 5.4% (revised from 5.6%) and potentially end at 4.6% in 2024 (revised from 5.1%). This implies that in 2024, there could be different cutbacks accumulating an adjustment of 80 bps (a scenario less aggressive than market estimates, assuming cutbacks in 2024 totaling 100 bps). This trend of cutbacks would be maintained for the following years, leading to the rate reaching 2.9% in 2026.
During his press conference, Jerome Powell stressed that it is still too early to declare victory. Therefore, it will take some time for inflation to return to the 2% target. However, he expressed satisfaction with the progress observed in controlling inflation. Finally, he pointed out that the baseline scenario no longer implies a new increase in the reference rate, as was envisaged 60 or 90 days ago.
FED macroeconomic perspectives (December vs. September)
Source: Federal Reserve