The Fed’s Continued Pause in Rate Hikes: What You Need to Know

On Wednesday, the Federal Reserve kept interest rates unchanged after its policy meetings. This is the third consecutive meeting where the central bank has opted not to raise interest rates during its current tightening monetary policy cycle.

Key takeaways from the FOMC rate decision and Federal Reserve Chair Jerome Powell’s press conference:

  • The Fed decided to keep interest rates unchanged for the third consecutive meeting and signaled a clear end to its aggressive rate-hiking campaign. Recent economic indicators show a slowdown in economic growth after a strong third quarter. Job gains have slowed but remain solid, and the unemployment rate is low. Inflation has come down from previous levels but is still elevated. The U.S. banking system is stable, but tighter financial conditions may affect the economy, hiring and inflation, with uncertainty about the extent of these effects. The central committee is closely monitoring inflation risks.
  • Although the vote to maintain rates was unanimous, the committee has clear divisions regarding their rate outlooks. Eight officials expect fewer than three quarter-point cuts next year, while five anticipate more. According to the latest Summary of Economic Projections from the Federal Open Market Committee, the median forecast suggests the federal funds rate will be at 4.6% at the end of 2024, compared to the committee’s current target range of 5.25% to 5.5%. In contrast, the median estimate from September’s forecast predicted a 5.1% rate at the end of next year. The Fed envisions the Fed funds rate reaching 3.6% by the end of 2025, according to the median estimate of 19 officials. This dovish outlook had a significant impact on the markets.
  • Powell mentioned that the committee discussed the possibility of rate cuts during its meeting, but it has yet to rule out the option of another rate hike if economic data supports it. However, the overall tone was dovish, and the statement indicated a softened stance towards further rate hikes by including the word “any” concerning additional policy tightening.
  • Inflation forecasts were adjusted downward from the previous quarter, which Powell acknowledged. Still, he also emphasized that the inflation battle is ongoing, and some FOMC participants adjusted their forecasts based on recent inflation data.
  • The committee’s goal is to achieve a soft landing for the U.S. economy, not a recession, with only a slight increase in unemployment expected over the next few years. Powell noted that the labor market is improving, and wage growth has moderated, though it remains slightly above the level consistent with 2% inflation. Given the progress made, the Fed’s mandates, full employment and price stability are now considered important.

The markets responded positively to the more dovish tone from the FOMC and Powell. Investors are now pricing in the likelihood of the first-rate cut occurring in March. The S&P 500 saw gains of 1%, two-year Treasury yields dropped by 25 basis points to around 4.5%, and ten-year Treasury dropped to 4.05%. The dollar approached its lowest level since August.


Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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