The United States (US) Central Bank, known as the Federal Reserve (The Fed), recently announced its decision to hold interest rates steady in its third meeting. This decision signaled the end of an aggressive interest rate hike campaign, with predictions of a rate cut next year.

Fed officials unanimously decided to maintain the target range for the benchmark interest rate of 5.25% to 5.5%, the highest level since 2001. They did not project further rate increases, marking the first change in their projections since March 2021.

Fed Chairman Jerome Powell said they were prepared to raise interest rates if price pressures emerged, but highlighted the current focus on potential rate cuts as inflation nears its 2% target.

The market reaction to the uncertainty of a rate cut was seen in a surge in Treasury prices and a rise in stock prices. Investors are also likely to increase their bets on a rate cut in March.

The Fed’s quarterly Dot Plot projections reflect plans to cut interest rates by 75 basis points next year, more than previously forecast. Although the median expectation for rates at the end of 2024 is 4.6%.

Fed Chairman Jerome Powell has been emphatic that the projections are not a set plan. They reflect a response to changing market dynamics and economic conditions. In an effort to provide clarity, Powell emphasized that the projections are more of an adaptive guide than a final decision.

In addition, small changes to the post-meeting statement reflected a shift in focus from rate hikes to a more careful assessment of the potential for cuts, reflecting a response to evolving economic conditions.

The slowdown in inflation over the past year, while still high, is an important point of recognition from the Fed. It reflects their awareness of complex price dynamics. Despite high inflation, the committee observed a slowdown that could ease market concerns.

The Fed projects unemployment at 4.1% by the end of 2024. Fed Chairman Jerome Powell stressed that a weak labor market would significantly influence the decision to cut interest rates. The Fed also projects US GDP growth of 2.6% in 2023 and 1.4% in 2024.