The Federal Reserve held the fed funds rate unchanged for the third time in December 2023, with the interest rate standing at 5.25%–5.5%, citing strong economic activity, moderate job gains, and low unemployment rates. However, inflation remains elevated. The rate cut as projected by Federal Open Market Committee ("FOMC") participants in the Summary of Economic Projections has delivered an early Christmas present to markets, with investors anticipating a faster and sharper easing cycle in 2024. The move has given investors a ray of hope for 2024, which led to a rally above more than 1% in S&P and Dow Jones, which then carried on to the Asia market.

The market has been discounting the rate cut by next year (as can be seen from the market inching higher), which made it challenging for Fed Chairman Jay Powell to push back on the idea that the US central bank was ready to cut rates sharply over the next 12 months.

The US dollar sank, gold ripped above the $2,000 mark, yields fell, and the stock market was high as the so-called "dot plot" indicated the fund rate to be at 4.75% by the end of 2024, below their previous projections of 5.25%. Even though the writing is on the wall, the governor stands out with a warning sign that the Fed retained the option to hike rates again, but this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did. The case for higher wages for longer was alive till the last meeting, but after the latest economic projections, it is certainly in the cold box.

The rate cut is not pleasing for the markets but also for the central banks, as the ECB and Bank of England were having a tough time selling to the market of holding rates higher and maintaining a hawkish bias. Central banks around the world will follow suit and try to navigate the messaging of when they expect to start cutting them.

For months, the Fed has been dragging talks in town for one more hike before the New Year, but the inflation trajectory has allowed the central bank to be softer, allowing the market to move the Fed talk in the right direction. So now, the rhetoric has changed slightly, and a rate cut is expected as the next step—the only question is when. FOMC changed its policy statement to acknowledge slower economic growth since the beginning of the fourth quarter and the decline in inflation over the last year.

The Committee is attentive to inflation risks and will continue to consider cumulative tightening of monetary policy, lags in affecting economic activity and inflation, and economic and financial developments in its decisions.

The next FOMC meeting is scheduled for January 30-31, 2024.

Interesting highlights from FOMC meeting

• Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.
• Recent indicators suggest that growth of economic activity has slowed substantially from the outsized pace seen in the third quarter. Even so, GDP is on track to expand around 2-1/2 percent for the year as a whole, bolstered by strong consumer demand as well as improving supply conditions. After picking up somewhat over the summer, activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates. Higher interest rates also appear to be weighing on business fixed investment.
• While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time...
• In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate based on what each participant judges to be the most likely scenario going forward. While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table. These projections are not a Committee decision or plan; if the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals.
• We are seeing strong growth that appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures. And we're seeing inflation making real progress. These are the things we've been wanting to see. These are the things we've been wanting to see. We can't know -- we still have a ways to go. No one is declaring victory
• I would say that. I think there's always a probability that there will be a recession in the next year, and it's a meaningful probability, no matter what the economy's doing, so it's always a real possibility. The question is, is it -- so, it's a possibility here
• I have always felt, since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation in tightening cycles. So far, that's what we're seeing; that's what many forecasters on and off the committee are seeing. This result is not guaranteed. It is far too early to declare victory. And there are certainly risks. It's certainly possible that the economy will behave in an unexpected way.
• Question: Do you think 3% would be reasonable?

POWELL: I don't want to identify any precise point because I would be able to look back then and find it turned out not to be right, but we'll be looking at it, looking at the broad collection of factors.