This year is expected to bring several anxiously awaited interest rate cuts. However, the first FOMC meeting of 2024 ended with the same result as the last three meetings – no change to the Fed Funds Rate.
While committee members did not lower interest rates, they did change the language used to describe the state of the economy and the path forward. The shift in language and Chair Powell’s comments provided some clarity that business leaders can use to forecast rate cuts.
No Change to the Fed Funds Rate in January
The FOMC voted to hold the Fed Funds Rate steady at a target range of 5.25 – 5.50% for the fourth consecutive meeting. This resolution was widely anticipated by financial analysts with nearly 98% of futures traders predicting the outcome correctly.
Committee members gave several reasons for their decision including continued economic expansion, a low unemployment rate, and easing inflation. Recent economic data supports these claims:
- The Bureau of Economic Analysis [BEA] reported that real Gross Domestic Product increased by an annualized 3.3% in the fourth quarter and 2.5% for 2023 as a whole.
- The Bureau of Labor Statistics reported that the unemployment rate was unchanged at 3.7% in December – a very low rate by historical standards.
- The BEA reported that the PCE inflation rate was 2.6% in December – the same as the previous month but down substantially from 2023 highs.
The FOMC concluded that “the risks to achieving [their] employment and inflation goals are moving into better balance.” This language diverged from previous meeting statements – demonstrating a more positive outlook from FOMC members. However, they went on to say that the economic outlook remains uncertain despite the noted progress.
Interest Rates Likely to Decline Later This Year but March Rate Cut Is Unlikely
In the press conference following the interest rate announcement, Federal Reserve Chairman Jerome Powell said that rate cuts are expected later this year. However, he also said that a rate cut at the next meeting in March is “not the most likely case.”
Both Chair Powell’s comments and the FOMC’s written statement said the committee needs “greater confidence that inflation is moving sustainably toward 2 percent” before cutting interest rates. When asked about this language, Chair Powell described the last six months of inflation data as “good,” but said that the committee needs more data that is similarly “good” to justify a rate cut.
Chair Powell explained that cutting interest rates too quickly could lead to a reversal in inflation data, which would reverse the progress they’ve recently made. On the other hand, he noted that waiting too long to reduce rates could have negative consequences for economic activity and the labor market.
After the meeting, analysts quickly updated their interest rate projections. About 60% of these analysts now forecast a 0.25% rate cut in May, while another 31% expect a more substantial cut at the same meeting.
While the Fed’s guidance at the most recent meeting was hopeful, it was also somewhat opaque. Businesses looking for more concrete information should pay close attention to the next meeting on March 19th and 20th.
At the March meeting, the board will release an updated Summary of Economic Projections. This quarterly report summarizes FOMC members’ expectations for GDP, unemployment, inflation, and – most notably – the Fed Funds Rate.
Changes from the last Summary of Economic Projections in December will offer clarification on how much the Fed expects to lower interest rates this year. The depth of anticipated rate cuts will provide additional insights into the timing of these cuts and the future path of interest rates.
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