The US central bank is thinking about lowering interest rates next year if inflation keeps going down.
Their predictions show that most decision-makers in the Federal Reserve expect to decrease the key interest rate in 2024. Even though they didn’t change it this Wednesday, keeping it at 5.25%-5.5%, the highest in 22 years, they hinted that they might cut it in the future.
The US Federal Reserve has hinted that it may begin lowering interest rates next Year
This news made the stock market go up, and the Dow Jones hit a new record high, closing the day 1.4% higher. The central bank has been raising rates a lot since March 2022 to slow down the economy and control rising prices, which went up at the fastest rate in decades last year.
Jerome Powell, the chairman of the bank, said, “It is too early to say we’ve won. There’s a lot of uncertainty, and the economy has surprised us, so we need to see more progress.” Despite this, the Federal Reserve is becoming more confident.
After the meeting, the released projections showed that none of the committee members believed they needed to increase rates in 2024. Instead, most policymakers now think they will lower rates to below 5% next year, marking a significant change from a few months ago.
Neil Birrell, the chief investment officer at Premier Miton Investors, a London-based asset management firm, said, “This gives real credence to the view that [the Fed] thinks inflation is under control and believes that policy is producing the right outcome for the economy.”
The Federal Reserve’s announcement came before several central bank meetings in Europe. The Bank of England, meeting on Thursday, is also expected to keep interest rates steady.
During a press conference after the announcement, Mr. Powell expressed his approval of signs that inflation, the rate at which prices rise, had slowed. However, he also emphasized that the bank is keeping an eye on the risks of prices going up, noting that inflation is still above the 2% rate the bank aims for.
Even though Fed policymakers don’t anticipate more increases, Mr. Powell mentioned they don’t want to rule out that possibility.
“If the economy doesn’t go as planned, our approach to policy will change,” he stated.
In the US, inflation has already dropped significantly from its peak of 9.1% in June 2022. Recent figures from the Labor Department show prices went up by 3.1% last month compared to the same time the previous year.
While Fed members predict further drops in inflation next year, they don’t foresee it returning to the target rate of 2% until 2026.
Raising interest rates makes borrowing more expensive, encouraging saving and reducing borrowing for things like homes and businesses, which helps cool the economy and ease the pressure on rising prices.
Officials expect the US economy to grow by 1.4% next year, which is notably slower than this year. Additionally, they anticipate a slight increase in the unemployment rate, which is currently at 3.7%.