The Federal Reserve may cut interest rates next year, as U.S. inflation cools and the economy may be in need of a “soft landing.”
Data released by the U.S. Department of Commerce on December 22nd indicated that the U.S. personal consumption expenditures (PCE) price index increased by 2.6% year-on-year in November. The core PCE price index excluding food and energy prices also increased, although at a narrower rate than the previous month, suggesting that U.S. inflation is experiencing a cooldown. Many in the market believe that the Federal Reserve’s current interest rate hike cycle may be coming to an end, with potential cuts on the horizon for next year, illustrating the uncertainty over whether the U.S. economy can achieve a “soft landing.”
The Federal Reserve held its final monetary policy meeting of the year in mid-December, announcing that the target range for the federal funds rate would remain at 5.25% to 5.5%, marking the third consecutive time since September that the Fed has kept this interest rate range unchanged.
Federal Reserve Chairman Powell noted that while the Fed has made progress in reducing inflation, further evaluations are necessary, especially as the Fed expects U.S. economic growth to slow next year. The Fed recently released its latest economic outlook, which raised its U.S. economic growth forecast for this year, yet lowered its 2024 economic growth forecast and expressed concerns about tighter financial and credit conditions potentially weighing on economic activity.
The Wall Street Journal previously reported that six months ago, economists surveyed believed the U.S. would enter a recession within the next 12 months, but recent expectations of interest rate cuts have alleviated some concerns. However, there is considerable uncertainty in the Fed’s predictions of future interest rate trends, with economists at Wells Fargo Securities predicting the Fed will hold its monetary policy meeting in June next year and cut interest rates for the first time.
Desmond Lachman, an economist at the American Enterprise Institute, highlighted the uncertainty of ensuring a “soft landing” for the U.S. economy, emphasizing that the impact of monetary policy changes can be both delayed and varied.
As the U.S. economy faces potential interest rate cuts and hopes for a “soft landing” remain uncertain, the Federal Reserve’s future actions will be under close observation as economists and analysts continue to monitor and interpret economic developments.