The Federal Reserve’s final policy meeting of 2023 was highly significant as the Fed signalled that it expected to cut rates three times in 2024. This came as a surprise as the Fed has stuck to a hawkish script for months, warning the markets that inflation remains too high and that the Fed could raise rates if inflation rises unexpectedly. The Fed had repeatedly stated that interest rates would stay in restrictive territory for an extended period, a stance known as “higher for longer”. The Fed’s surprise pivot sent the equity markets sharply higher and the US dollar declined against most the major currencies.
According to the minutes, members expected three rates cuts of 0.25% each by the end of 2024, but failed to provide any details about the timing of any cuts. The minutes said that the Fed considered the current benchmark rate at or close to its peak but that there was an “unusually elevated degree of uncertainty” about the rate policy path, with some members saying that rates should not be lowered until inflation fell closer to the 2% target.
The minutes reflected that the Fed views that inflation is under control, saying that “clear progress” had been made, but noted that core services inflation was still moving higher. The Fed appears to be cautiously optimistic – inflation is moving in the right direction but the battle is not yet over. At the December meeting the Fed all but declared that the rate-tightening cycle is over, but as the minutes indicate, the Fed is uncertain as to when it will press the rate-cut button.
The US Dollar is showing a muted reaction to the Federal Reserve minutes, posting gains of around 0.30% against the majors on Thursday. The US Dollar continues to gain ground on the Japanese yen, with the USD/JPY currency pair up 2% this week.
In the US, the major stock indices closed lower on Wednesday in the aftermath of the Fed minutes.
The S&P 500 Index dropped 38.02 points (0.80%) to close at 4,704.81.
The Nasdaq 100 Index declined by 175.45 points (1.06%) to close at 16,368.49.
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