Rates remain steady as the FOMC remains focused on inflation

In the last announcement of the year, the US Federal Reserve (the Fed) announced it’s holding the target range for the federal funds rate at 5.25% to 5.50% during the Federal Open Market Committee’s (FOMC) statement on December 13, 2023 Opens in a new window..

In the statement, the FOMC confirmed recent indicators suggest economic activity growth has slowed as job gains are modest but remain strong, the unemployment rate remains low and inflation eased, although it remains above the target rate of 2%.

CIBC Capital Markets acknowledged the rate hold was not a surprise. The decision to leave rates unchanged affirms the Fed has reached its cycle terminal rate and its next move in the new year will likely be a rate cut. The Dot Plot points to three rate cuts in 2024, four cuts in 2025 and three additional rate cuts in 2026. Essentially, the Fed is slightly more dovish on rates with monetary policy expected to be slightly less restrictive next year and into 2025. Consistent with this outlook, inflation is likely to come down at a quicker rate than originally projected.

Adam Ditkofsky, Senior Portfolio Manager, Global Fixed Income at CIBC Asset Management also confirms the FOMC statement acknowledged growth of economic activity slowed from its strong pace in the third quarter and inflation has eased this past year, but continues to remain elevated. Ditkofsky says, “The more relevant part of the FOMC statement was the accompanying projection material. This included more rate cuts over the next two years than previously forecasted, with the projected federal funds rate being reduced from 5.1% to 4.6% in 2024 and from 3.9% to 3.6% in 2025.”

“In addition, the inflation outlook for next year was also brought moderately lower with the core Personal Consumption Expenditures (PCE) price index projection coming down from 2.6% to 2.4%,” confirms Ditkofsky.

“While the bond market had already priced in more rate cuts than the Fed previously projected, yields moved lower after the FOMC statement, as it was seen as being more favourable than expected. Although the overall outlook remains positive for bonds, we’re somewhat cautious of the Fed’s outlook. The Fed continues to believe it will be able to achieve a Goldilocks soft landing scenario with solid gross domestic product (GDP) growth, full employment and normalizing inflation. All of which would be positive for stocks, bonds and all other risk assets.”

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