Fed Pivots, Eyes 3 Interest Rate Cuts to Kickstart Next Year

For the third consecutive week, the Federal Reserve held its benchmark interest rate steady on Wednesday, and policymakers hinted that they anticipate reducing it by three quarter points in the next year.

After the sharpest rate rises in four decades, the Fed's statement on Wednesday made it quite clear that it is done raising interest rates and is moving toward lowering them as early as next summer.

Powell Signals End to Rate Hikes: Wall Street Cheers Potential for Future Cuts

At a press conference, Chair Jerome Powell stated that given how persistently inflation has decreased, Fed policymakers are probably done hiking rates.

Traders on Wall Street rejoiced at the thought of further rate cuts. Following the Fed's release and Powell's press conference, stock prices shot higher and bond rates fell.

The central bank's assessment of interest rates and the economy underwent a significant change on Wednesday. Powell had stated only two weeks prior that it was "premature" to draw the conclusion that the Fed has completed raising its main benchmark rate or to "speculate" about reductions in that rate.

However, he gave a hint on Wednesday that rate hikes by the Fed are most likely coming to an end. And he admitted that during their discussion, the authorities had talked about the possibility of rate cuts.

He also acknowledged that he had been too gloomy when he warned, in a high-profile speech last year, that a steep reduction in inflation would come with the "pain" of rising unemployment. Instead, even while unemployment is still low at 3.7% and the rate of layoffs has not increased, inflation has slowed dramatically approaching the Fed's 2% objective.

Powell stated in answer to a query that the Fed is aware that holding interest rates high for an extended period of time and delaying rate cuts for an extended period of time may jeopardize the economy.

She stated that the Fed "has the luxury" of maintaining high rates for the time being in case inflation and the economy pick up speed, "while declaring that they're done hiking, and that cuts are in the making."

While most economists predict rate cuts to start in May or June, Wall Street speculators are placing bets that they may happen as early as March.

Powell's Optimistic Outlook and the Delicate Balancing Act of Inflation Management

Powell was upbeat at his press conference, expressing hope that the inflation that has plagued American companies and consumers for almost two years is beginning to approach the Federal Reserve's goal rate of 2%.

He mentioned, for instance, that inflation has decreased in the three areas the Fed has been closely observing: commodities, housing, and services.

The Fed chair minimized a worry voiced by a few analysts, namely that the eventual reduction in inflation from the present level of around 3% to 2% may prove more difficult than prior price increase slowdowns.

The Fed maintained its benchmark rate at around 5.4%, which is the highest it has been in 22 years. As a result, the cost of mortgages, auto loans, corporate borrowing, and many other credit products has increased significantly. Home sales have been severely impacted by higher mortgage rates. Additionally, less money is being spent on appliances and other pricey items that consumers frequently purchase on credit.

On the other hand, anytime the Fed decides to lower interest rates, the cost of borrowing would go down for everyone in the economy. Although share prices have already increased in anticipation of rate reduction, which may restrict any additional rises, stock prices might also climb.