Stay informed with free updates
Sign up for US interest rates myFT Digest — delivered straight to your inbox.
Wall Street’s benchmark index hit its highest level in nearly two years after Federal Reserve Chairman Jay Powell sent his clearest signal that the U.S. central bank will start cutting interest rates in 2024.
The central bank kept interest rates at a 22-year high, but with new forecasts from central bank officials pointing to cuts worth 75 basis points next year – a more bleak outlook for rates than previous forecasts.
Powell’s comments also signaled a shift in the bank’s tone after the Fed’s decision. He said the benchmark rate is now “at or near the peak of this tightening cycle.”
The Federal Open Market Committee’s decision to keep rates at 5.25 percent to 5.5 percent came with the release of the Fed’s so-called dot plot, which showed most officials expected rates to end next year at 4.5 percent to 4.75 percent. .
Officials expect rates to drop further in 2025, with most officials predicting they will be between 3.5 percent and 3.75 percent.
Forecasts for a steeper pace of rate cuts fueled a rally in U.S. stocks and a sharp drop in Treasury yields, with the two-year yield posting its biggest daily decline since the collapse of Silicon Valley banks in March.
The two-year Treasury yield, which moves in line with interest rate expectations, fell 0.3 percentage points to 4.43 percent after the Fed’s announcement. The benchmark 10-year Treasury yield fell 0.17 percentage points on Wednesday, and fell further during Asian morning trade to fall below 4 percent for the first time since August.
The S&P 500 rose 1.4 percent to close at its highest level since January 2022.
European stocks and government bonds joined Thursday morning’s rally. The regional Stoxx Europe 600 rose 1.5 percent, lifted by rate-sensitive real estate stocks. France’s CAC 40 added 1.5 percent, while London’s FTSE 100 gained 1.7 percent.
The yield on 10-year German bonds – the eurozone’s benchmark – fell 0.12 percentage points to 2.04 percent.
“In September they went to great lengths to talk about rate cuts,” said Priya Misra, portfolio manager at JP Morgan Asset Management. “They were behind the curve on inflation, but in terms of recession they might want to be ahead of the curve.”
In a statement, the central bank spelled out conditions for considering “any additional policy agency appropriate to return inflation to 2 percent over time” — softer language suggesting the central bank may not see a need to raise further. Again rates.
Powell reiterated the Fed’s commitment to remain “cautious” with future rate decisions as economic growth cools and “real progress” has been made in curbing inflation.
He went home saying the Fed didn’t want to rein in the economy any longer than necessary.
“We know we risk waiting too long,” Powell said, referring to waiting too long to lower rates. “We know that’s a risk, and we’re very focused on not making that mistake.”
He later said the Fed would not wait until inflation returned to 2 percent to start cutting rates because “you have to loosen control over the economy beforehand” so “you don’t overdo it.”
The latest decision comes as the central bank tries to keep monetary policy tight enough to reduce inflation to its 2 percent target without damaging the economy and causing more job losses.
Some traders in futures markets expected the central bank to cut borrowing costs in early March, although this week’s inflation data and Friday’s firm jobs report fueled more bets that cuts would begin in May. Leading up to Wednesday’s rate announcement, traders were betting that interest rates would fall by more than a percentage point next year.
Fed officials’ unemployment projections were unchanged from September, with officials still expecting the unemployment rate to be 4.1 percent in 2024, up from 3.7 percent now.
However, estimates for core inflation, as measured by the personal consumption expenditure index, were cut slightly, with officials expecting to reach 2.4 percent in 2024 and 2.2 percent in 2025. In September, median forecasts put inflation at 2.6 percent. 2024 and 2.3 percent the following year.
To consider rate cuts, the central bank must be confident that inflation will return to 2 percent on a sustainable path. If slow consumer price growth is accompanied by a sharp rise in unemployment, the reason for the cut will be clear.
The question is what will happen if the economy survives when inflation declines. Some officials, such as New York Fed President John Williams and Fed Governor Christopher Waller, have suggested that further easing of monetary policy is necessary so that interest rates, once adjusted for inflation, are not too restrictive for households and businesses. .
Additional reporting by Kate Duguid in New York and Stephanie Stacey in London
