The Federal Reserve May Cut Interest Rates Next Year Reaching for a “soft landing”
Xinhua News Agency, Washington, December 22 (International Observation) The Federal Reserve may cut interest rates next year. Whether the economy can have a “soft landing” remains to be seen.
Xinhua News Agency reporter Xiong Maoling Xu Yuan Data released by the U.S. Department of Commerce on the 22nd showed that the U.S. personal consumption expenditures (PCE) price index increased by 2.6% year-on-year in November. The core PCE price index after excluding food and energy prices increased by 3.2% year-on-year. Average prices narrowed in the previous month. The narrowing of PCE growth indicates that U.S. inflation is “cooling.” The market generally believes that the Federal Reserve’s current interest rate hike cycle may be over and it may cut interest rates next year. It remains to be seen whether the U.S. economy can achieve a “soft landing.”
The Federal Reserve held its last monetary policy meeting of the year in the middle of this month and announced that the target range for the federal funds rate would remain unchanged at 5.25% to 5.5%. This is the third consecutive time since September this year that the Fed has kept this interest rate range unchanged.
In a statement after the meeting, the Fed said that in determining “any” further monetary tightening, the Fed will consider the cumulative degree of tightening, the lag in the impact of monetary policy on economic activity and inflation, and economic and financial developments.
Federal Reserve Chairman Powell said at a press conference after the meeting that the use of the word “any” indicates that the Federal Reserve believes that the current interest rates may be at or near the peak level of this interest rate hike cycle, but does not rule out the possibility of further interest rate increases. He also said that although the Fed has made progress in reducing inflation, there is still a long way to go and the Fed is carefully evaluating whether more action is needed.
At the same time, the Federal Reserve expects U.S. economic growth to slow next year. The Federal Reserve recently released its latest economic outlook, raising its U.S. economic growth forecast this year by 0.5 percentage points to 2.6% from its September forecast, and lowering its 2024 economic growth forecast by 0.1 percentage points to 1.4%. The Fed believes that tighter financial and credit conditions for households and businesses may weigh on economic activity, but the extent of the impact remains uncertain.
Regarding the question of whether the U.S. economy can achieve a “soft landing,” the Wall Street Journal recently reported that six months ago, economists surveyed generally believed that the U.S. economy would enter a recession in the next 12 months. Economists polled on average predicted no recession. This report believes that U.S. inflation has dropped better than expected and there are currently no signs of recession, but consumers have begun to reduce spending.
In recent statements by the Federal Reserve, expectations for interest rate cuts have attracted much attention. A “dot plot” of the Fed’s latest economic outlook shows that 17 of 19 Fed officials expect policy rates to be lower than current levels by the end of 2024, with most expecting rates to fall by 50 or 75 basis points base point. This means that at 25 basis points per cut, the Fed will cut interest rates two or three times next year.
Although expectations of interest rate cuts have aroused great response among investors, as Powell said, the “dot plot” does not represent actual monetary policy, and there is considerable uncertainty in the Fed’s predictions of future interest rate trends.
Economists at Wells Fargo Securities said in an analysis report that after nearly two years of rapid monetary policy tightening, the Fed’s shift to interest rate cuts next year seems to be the most likely outcome. They predict that the Fed will hold its monetary policy meeting in June next year. Interest rates were cut for the first time. The report believes that the U.S. economy may achieve a “soft landing” in 2024, but even if an economic contraction can be avoided, actual economic growth in the next few quarters may be lower than trend levels due to the restrictive stance of monetary policy.
Desmond Lachman, an economist at the American Enterprise Institute, told Xinhua News Agency that the overall U.S. economy has performed well this year, with inflation falling and the economy continuing to recover. However, due to factors such as the long lag time and variability of the impact of monetary policy, it is still unclear whether the Fed can ensure a “soft landing” for the economy.
[Editor in charge: Peng Yao]