The US Federal Reserve refrained from raising rates following its December meeting

Following the December meeting, the US Federal Reserve System (FRS) refrained from raising the rate, keeping it at 5.25–5.5%. Market participants do not expect a rate increase at subsequent meetings, already assessing the prospects for a policy reversal and reduction in the spring-summer of 2024. The Fed so far only points to a slowdown in economic growth, as well as a decrease in inflation at the end of the year, but refrains from giving a clear signal about the future of the rate, since it still does not want to give up the opportunity to raise it again.

Following the December meeting, the US Federal Reserve Open Market Committee did not raise the rate, keeping it at 5.25–5.5%. Thus, the regulator has actually completed the rate increase cycle initiated in March 2022. After increasing the rate by 0.25 percentage points in July, each subsequent meeting was accompanied by a comment from the regulator that further steps on the rate would depend on incoming data. And following the results of the last meeting, Fed Chairman Jerome Powell said that the regulator is not yet sure whether sufficient tightening of policy has been achieved.

In a statement following the meeting, the regulator noted for the first time a slowdown in growth – after strong results in the third quarter, and also indicated that job growth has slowed compared to the beginning of the year, although it remains at a high level.

Unemployment remains low, and inflation has fallen over the past year but remains elevated. Changing this wording in the text was the only indication of a possible end to the rate increase. The wording that when assessing the need for further tightening, the regulator will monitor incoming information and its impact on monetary policy was retained.

The dot plot with the forecasts of committee members in September assumed another rate increase before the end of the year, but now it includes a reduction in rates to 4.5–4.75% next year and to less than 3.5% in 2025. Market participants expect that the Fed will maintain the rate at meetings in January, March and May, and its reduction is already expected in June (in November, investors predicted a cycle reversal no earlier than July-September).

The updated forecast provides for higher GDP growth rates for this year – 2.6% versus 2.1% in September, but next year the growth will slow down to 1.4%.

Let us remind you that US GDP growth in the third quarter was higher than expected. In annual terms, GDP increased by 4.9% – analysts expected growth of 4.7% (in the second quarter the economy grew by 2.1%). The biggest contribution to the acceleration of the indicator was made by consumption.

The forecast for inflation was also improved – by the end of the year its growth may be 2.8%, not 3.3%, next year the figure will slow down to 2.4%. Core inflation growth will also be lower – 3.2% versus 3.7% this year and 2.4% versus 2.6% next year. At the end of November, prices increased by 0.1%; in annual terms, the increase was 3.1% versus 3.2% at the end of October. The cost of energy for the month decreased by 2.3%, while food prices increased by 0.2%. Core inflation (that is, excluding energy and food) increased by 0.3% after growing by 0.2% in October – primarily rent, as well as transport and medical services, became more expensive; in annual terms, the figure remained unchanged, 4% . The consumer spending deflator, which the Federal Reserve mostly focuses on, showed an increase of 3% in October (3.4% in September); excluding energy and food, price growth slowed from 3.7% to 3.5%. For unemployment, the forecast was not changed; the number of jobs created in November increased by 199 thousand against 150 thousand in October, but these rates are significantly lower than the annual average.

Capital Economics believes that the Fed may begin lowering rates as early as March, and in total rates next year could be reduced by 175 basis points – a faster rate reversal is indicated by the slowdown in core inflation and the dynamics of the ISM Purchasing Managers’ Index (in November the indicator was 46.7 points; a value below 50 points indicates a slowdown in activity). Leading analyst at Freedom Finance Global Natalya Milchakova notes: while inflation in the United States remains above the Fed’s target level of 2% per year, trends towards its slowdown are already clearly evident.

Tatiana Edovina