Federal Reserve officials shifted their tone this week, inching closer to the conversation markets have long been having: When will the central bank begin cutting interest rates?
A litany of policymakers — including six who will vote on policy next year — indicated in recent days that they were comfortable with keeping rates steady at their December meeting, encouraged by the downward trend in inflation and data showing a slowing economy.
Though Fed officials showed little interest in discussing rate cuts, markets quickly latched onto comments by Governor Christopher Waller. An inflation hawk closely followed by Wall Street, Waller acknowledged the Fed would consider trimming rates if inflation continues to fall, in line with typical policy guidelines central bankers use.
Fed Chair Jerome Powell, who is set to speak at Spelman College in Atlanta on Friday, is much more likely to reiterate that it’s too soon to declare victory than discuss rate cuts. Concern over a potential renewed bout of inflation is likely to keep the Federal Open Market Committee forecasting much higher interest rates in 2024 than the four quarter-point cuts priced in by markets.
“Powell will be cautious not to pop champagne corks but the mantra will soon shift from higher for longer to higher for long enough,” said Diane Swonk, chief economist at KPMG. “Inflation has come down more rapidly than they expected and that means that they are likely to pencil in more cuts than they were willing to in September.”
The odds of a quarter-point cut at the FOMC’s March meeting have risen to that of a coin toss, with markets now fully pricing in a cut in May. They see more than a full point of cuts by the end of next year. Conversely, Fed officials projected rates at 5-5.25% at the end of 2024, according to their median forecast released in September — just one-quarter point lower than the current level.
Some Wall Street predictions are even more bold. Deutsche Bank, which is forecasting a mild recession next year, reiterated its view this week that the Fed is likely to begin to cut in June and reduce rates by a total of 175 basis points through year-end. Billionaire investor Bill Ackman sees the central bank cutting rates as early as the first quarter of 2024.
“The expectations for Chair Powell to opine on rate cuts have clearly risen in light of the recent comments” from Waller, said Yelena Shulyatyeva, senior US economist at BNP Paribas. “He may not go as far as to firmly validate a new dovish tone.”
“After all, the Fed’s target is not necessarily achieving a soft landing; it is getting inflation back to the 2% target,” she said.
Recent inflation news has been upbeat. The core personal consumption expenditures price index, which strips out the volatile food and energy components, rose 0.2% in October. And headline inflation advanced at an annual pace of 3%, the slowest since 2021.