Fed Faces Pressure to Cut Rates in 2024
The central bank entered 2023 having raised interest rates at the fastest pace since the 1980s as part of an aggressive campaign to cool red-hot inflation. Now, as the year draws to a close, that campaign appears to be all but over. The Fed last raised rates in July to a 22-year high. After holding rates steady at their third consecutive meeting this month, Fed officials predicted they would likely pivot to cutting rates three times in 2024. Even Fed Chair Jerome Powell, after months of sounding hawkish, turned slightly dovish at his last press conference of the year: "That's us thinking that we have done enough but not feeling that really strongly confidently and not wanting to take the possibility of a rate hike off the table. Nonetheless, it's not the base case anymore." The debate in 2024 will likely be about when cuts can begin and whether the Fed will be as aggressive as markets expect. The Fed’s preferred reading of "core" inflation, which strips out volatile food and energy prices, stood at 3.5% for the month of October, down from 3.7% in September and 4.3% in June. That puts the reading lower than what Fed officials had predicted for the end of the year. In January 2023, core inflation was 5.6%, and the Fed had just completed some eye-popping tightening measures — including a 50-basis-point hike in December 2022 and 75-basis-point hikes in the summer and fall of 2022. But Powell was already indicating that same month that progress had been made. "We can now say for the first time that the disinflationary process has started," Powell said in January. Rates went up by a quarter percentage point on Feb. 1 and then by quarter-point increments in March and May, defying some predictions that a regional banking crisis that roiled the financial world during that time might stop the Fed from hiking further. The Fed then paused at its June meeting before raising rates for the last time this year in July, settling at a 22-year high of 5.25% to 5.5%. Investors were increasingly eager for the central bank to indicate the rate-hiking campaign was over, but Fed officials were careful to say repeatedly that they needed to see more progress on inflation before they would be ready to stop raising rates. Powell himself offered several warnings that investors should not presume the hikes were done. One came in August, as Fed officials decamped to an annual symposium in Jackson Hole, Wyoming. As late as Dec. 1, Powell warned against assuming the Fed was finished raising rates. "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Powell said in a speech at Spelman College. Then the central bank shifted course last week, taking many by surprise. Not only did the interest rate-setting committee pencil in three rate cuts for 2024, but Powell acknowledged that the central bank was likely at the peak of the current rate-hiking cycle. The markets rallied, cheering a return to cuts in 2024. Investors, which had been pricing in four rate cuts for next year going into the December meeting, boosted those bets to five. And they are now predicting the central bank will begin to start these cuts in March. It is also clear, however, that the decision will not be a straightforward one and will hinge on data. While the median projection for next year is three cuts, predictions from individual Fed members vary. Two members see holding rates at current levels, five see two cuts next year, six see three cuts, and four see four cuts next year. There was more evidence of this divergence among Fed officials in the days after the last meeting. In media interviews, some Fed officials began pushing back on the market’s bullish reaction while others acknowledged possible cuts were part of the current discussion. New York Fed president John Williams made it clear that he felt it would be premature to talk about a rate cut in March, while Chicago Fed president Austan Goolsbee said he was confused by the market’s response. Other officials, however, have been willing to acknowledge that cuts are on the table. One was San Francisco Fed president Mary Daly, who said it was appropriate to begin the rate-cut discussion given the progress on inflation. If inflation continues to drop, the Fed's benchmark rate would still be restrictive even with three cuts, she told The Wall Street Journal. Atlanta Fed president Raphael Bostic also predicted cuts, but in the second half of 2024. What could determine how quickly or how much the Fed will cut is whether the US economy falls into a recession or not. Some think the Fed won’t cut rates three times unless a recession appears. Powell made it clear last week that the economy could still move in surprising directions in 2024. "Nobody is declaring victory," he said. "That would be premature."
