Has the Fed stopped raising rates for good?

Inflation has remained at low levels, comparatively to earlier this and last year, with the latest data showing the annual core inflation lowering to 3.1%. While still not quite at the Federal Reserve’s target of 2%, these levels have once again be judged to be enough to keep interest rates between 5.25% to 5.5%.

“Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter,” the committee said. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

What this means is that the key economic indicators are at acceptable levels for the Fed to not need to make any major decisions. Were unemployment to have suddenly increased, for example, the Fed may have been forced to cut rates to prevent major economic disruption like during the covid-19 pandemic.

It cannot be said rates have stopped for good, as at some point in the future there will be some circumstance which necesitates a rise. Experts have been discussing what the continued rate freeze means.

“We have stressed for some time that the Fed is finished hiking, but it’s taken until now for that to crystallize among a broad range of policymakers,” Morgan Stanley economists said in a recent research note.

When will interest rates be cut?

The speculation surrounding the timing of a potential rate cut has increased. The crucial factor influencing the decision to lower interest rates is the extent to which inflation is back at that 2% target. In projections released after the Fed meeting, the central bank expects the interest rates at the end of 2024 to be around 4.6%; clearly they expect current levels to do the necessary damage to inflation.

“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,” said Neil Birrell, chief investment officer at Premier Miton Investors, an asset management firm.

What will be needed before these cuts are made is a continued downtrend in inflation, coupled with robust employment figures and resilient economic growth, may embolden the Federal Reserve to consider lowering rates. No economic surprise can be ruled out, like the Ukraine war in 2022. Any major shocks could be a huge roadblock for future rate cuts.

The next Federal Reserve meeting will be 28 and 29 of January, which will be the next opportunity to cut interest rates.