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Federal Reserve Chairman Jay Powell sent his clearest signal Wednesday that the U.S. central bank is ending two years of tightening monetary policy and will begin cutting rates in 2024, sending Wall Street stocks close to a record high as investors celebrate the prospect of lower borrowing costs.
The Fed held interest rates at a 22-year high, but the decision came with new information from central bank officials pointing to a 75 basis point rate cut next year – a forecast more dangerous for rates than previous information.
Powell’s comments after the Fed’s decision also showed a change in tone from the bank. The rate is now “probably at or near its peak for this tightening cycle”, he said.
The Federal Open Market Committee’s decision to hold rates at 5.25 percent to 5.5 percent came alongside the Fed’s so-called dot plot, which showed that many officials expected the the prices will end next year at 4.5 percent to 4.75 percent. .
Officials expect the decline to be even lower in 2025, with most officials saying they will end up between 3.5 percent and 3.75 percent.
Those expectations for a rate hike led to a surge in U.S. stocks and a sharp drop in earnings, with the two-year bond posting its biggest daily decline since the recession. of Silicon Valley Bank in March.
The two-year Treasury yield, which tracks interest rate expectations, fell 0.3 percent to 4.43 percent after the Fed’s announcement. The benchmark 10-year Treasury yield fell to 0.17 percent on Wednesday, and fell further during morning Asian trade to settle lower. 4 percent for the first time since August.
The S&P 500 index gained 1.4 percent to close at its highest level since January 2022.
“They came out high for a long time in September to talk about lowering rates,” said Priya Misra, managing director at JPMorgan Asset Management. “They were behind the inflation rate, but they may want to be ahead of the curve in terms of the slowdown.”
In a statement, the Fed explained that it will consider “any policy adjustments that may be necessary to return the rate to 2 percent over time” – soft language that suggests that the the central bank sees a need to raise. measure again.
Powell reiterated that the central bank was committed to proceeding “carefully” with future rate decisions due to the expectation that the economy would be soft and that there was “progress” true” in defeating the weather.
He drove home that point, saying the Fed doesn’t want to restrict the economy any longer than necessary.
“We’re aware of the risk that we’re going to take a long time,” Powell said of the long wait to cut costs. “We know it’s a risk and we’re very focused on not making that mistake.”
He later added that the Fed will not wait until inflation returns to 2 percent to start reducing rates because “you want to reduce restrictions on the economy going forward” in that case. so you don’t overdo it”.
The latest decision comes as the Fed tries to maintain monetary policy to bring rates back down to its 2 percent target without destroying the economy and causing more jobs.
Some traders in futures markets had expected the Fed to begin lowering lending rates in early March, although this week’s inflation data and a solid jobs report on Friday prompted many. bets will start in May. Until Wednesday’s rate announcement, traders indicated that interest rates could fall by more than 1 percent next year.
Data from Fed officials for unemployment were little changed from September, and officials still expect the unemployment rate to rise only slightly to 4.1 percent in 2024, from 3.7 percent now.
However, estimates for economic growth, as measured by the personal expenditure index, were slightly lowered, and officials expect it to fall to 2.4 percent in the 2024 and 2.2 percent in 2025. In September, the intermediate models showed a price of 2.6 percent in. 2024 and 2.3 percent the following year.
In order to consider lowering rates, the Fed needs to make sure that the price is going back to 2 percent in a sustainable way. If consumer price growth slows and unemployment rises sharply, the reason for the cuts will be clear.
The question that arises is what happens if the economy stays stable when prices fall. Some officials such as John Williams, the president of the New York Fed, and Christopher Waller, the Fed governor, have suggested that loosening monetary policy may be necessary to avoid Interest rates, when adjusted for inflation, should not be too restrictive for families and businesses. .
Additional reporting by Kate Duguid in New York