What to watch at the final Fed meeting in 2023

Federal Reserve officials will end a year of aggressively fighting inflation Wednesday afternoon, when they are expected to use their final 2023 policy decision to leave interest rates at their highest level in 22 years.

The Fed is ending the year on pause after the most intense interest rate hike campaign in decades, intended to quell the rapid rise in prices that has tormented consumers since 2021.

With inflation now having eased significantly, central bankers have increasingly signaled that they may stop raising borrowing costs, which are pegged at a range of 5.25 to 5.5 percent. The question investors will focus on Wednesday is how far rates are expected to fall in 2024 — and when those cuts might begin.

The Fed will release its statement and a new set of quarterly economic projections at 2 p.m., followed by a news conference with Jerome H. Powell, Chairman of the Fed, at 2:30 p.m. Here’s what to watch.

Investors will closely examine the Fed’s new economic projections, the first released since September. Three months ago, authorities planned to raise interest rates again in 2023 – now considered unlikely – before cutting them twice in 2024.

This begs the question: Where will policymakers see interest rates at the end of next year? If they kept their forecast at 5.1 percent, that would now imply just one rate cut. A cut to 4.9 percent would mean two rate cuts are expected.

The economic estimates will also provide insight into the reasoning behind the rate projections: They will show where officials expect inflation, unemployment and growth to be at the end of the next few years and over the long term.

One thing the projections won’t give is a sense of when rate cuts might begin. Economic projections only provide end-of-year estimates. For clues about timing, Wall Street will have to rely on what Mr. Powell signals at his news conference.

Mr. Powell has so far been reluctant to speculate on when borrowing costs might fall, or even to definitively signal that the Fed is done raising interest rates.

“It would be premature to conclude with certainty that we have reached a sufficiently restrictive position, or to speculate on when policy might be eased,” Powell said at the news conference. a recent speech.

Fed Governor Christopher Waller said in a recent speech that if Fed officials see disinflation continuing “for several more months – I don’t know how long it could last, three months, four months , five months – we could be sure that inflation is really falling,” fueling some speculation that the central bank could start cutting interest rates as early as early next year.

But Richard Clarida, who served as Fed vice chair until early 2022, said he thought a first cut in May or June would be more “natural” if the committee planned two cuts next year.

“Given what we know right now, March seems pretty early to me,” he said.

Mr. Powell’s comments will also be in focus for another reason: He could provide additional guidance on the kind of economic conditions the Fed believes are necessary to bring down inflation.

So far, the price increases have eased considerably without much difficulty. Hiring has slowed, but unemployment remains below 4%, a historically low level. Consumers have continued to spend, corporate profits are strong and even the rate-sensitive housing market has seen continued activity.

One of the main reasons why price increases have moderated despite this continued momentum is that the price of goods has started to fall slightly again. This is partly due to slowing demand, but it also owes a lot to the healing of global supply chains that helped bring products to market.

As workers return to the job market and fill vacant positions, wage gains have also slowed – which could suggest that labor-intensive service sectors will stop raising prices as well quickly.

But we can wonder whether this supply-induced price moderation will be enough to bring down inflation for the rest.

A Consumer Price Index report released this week showed that closely watched measure of underlying inflation, which removes volatile fuels and foods, held steady at 4 percent in November. That’s down from a peak of 6.6 percent, but the process of slowing down that measure has been fraught with challenges.

The question, which Mr. Powell could provide insight into, is whether the Fed can eliminate the remainder of rapid inflation from the economy without a sharp economic slowdown, achieving what economists often call a “soft landing.” “.

“The data is very encouraging,” said Karen Dynan, an economist at Harvard University. “But I don’t think we’re out of the woods yet.”