In a significant move, the Federal Reserve chose to maintain its policy interest rate at the conclusion of its last meeting in 2023. Fed Chair Jerome Powell, in acknowledging the current interest rate positioning, hinted at a potential peak in the ongoing tightening cycle. This decision follows a cumulative increase of 525 basis points in interest rates, with Powell noting the impact of the Fed’s restrictive monetary policy on economic activity and inflation.
The latest Summary of Economic Projections unveiled an interesting dynamic. While GDP growth estimates for the current year were revised upwards, there is an anticipation of a slowdown in 2024, with the median forecast dropping to 1.4%. Powell highlighted that participants adjusted their outlook on interest rates, projecting a federal funds rate of 4.6% by the end of 2024, further decreasing to 3.6% and 2.9% by the end of 2025 and 2026, respectively.
Powell’s statements on rate reductions injected a more dovish sentiment than initially predicted. He acknowledged the discussion on rate cuts, suggesting a potential shift in the Fed’s stance. Despite praising recent economic indicators, Powell remained cautious on inflation, emphasizing the gradual nature of reducing it to the 2% target. He clarified the Fed’s readiness to tighten policy if needed, leaving the possibility of further hikes on the table.
Powell took a cautious stance on inflation, stating that declaring victory over reducing it to 2% is premature. He explained the inclusion of “any” in the December statement as a signal that, while the Fed believes the peak has been reached, the possibility of additional hikes remains.
The market swiftly reacted to the Fed’s new economic projections and Powell’s comments. Bets on a rate cut by March 2023 surged, with a 70% probability assigned. Market participants almost fully priced in a cut by May. Fed swap markets forecast over 140 basis points in rate cuts by the end of 2024, implying nearly six rate reductions by December 2024.
The market’s response triggered a rally in gold, as tracked by the SPDR Gold Trust (NYSE:GLD), U.S. 20+ Year Treasuries (NASDAQ:TLT), and a fresh all-time high in U.S. blue-chip stocks represented by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA). The U.S. dollar experienced a more than 1% drop, signaling a shift in market sentiment.
As the Federal Reserve contemplates its monetary policy path, the market braces for potential rate cuts, impacting various asset classes. VipLiveAlerts-Pro brings you exclusive insights into this pivotal moment, ensuring you stay ahead in a rapidly evolving financial landscape.
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