After December inflation accelerated to 3.4% annually, where shelter costs, which have a significant weight, continue to look at a very gradual pace; and after knowing the first revision of the 4Q23 GDP, which showed a robust annualized growth of 3. 3% (beating expectations of 2%), the Federal Reserve (FED) made the unanimous and widely anticipated market decision to again leave the target range for the federal funds rate unchanged (for the fourth consecutive occasion) at 5.25% – 5.50% (the highest level in the last 22 years).
In this context, the statement noted that recent indicators suggest that economic activity has been expanding at a solid pace, with employment prevailing strong, while inflation, although it has declined over the past year, still remains elevated. Therefore, and as part of a modification from previous statements, the Committee emphasized that it believes the risks to achieving its employment and inflation targets are moving toward a better balance.
Another important change in the statement was that it modified the following wording: “to determine the degree of additional monetary policy tightening that might be appropriate to eventually return inflation to 2%”, replacing it with “in considering any adjustment to the target range for the federal funds rate”. This could be interpreted to mean that the hiking cycle may have come to an end, while the Committee will continue to take into consideration all incoming information, the developing environment and the balance of risks when making future decisions.
Finally, among other changes in language, and no less relevant, is the Committee’s strong message that it is in no hurry to start reducing the federal funds rate range, stating that “the Committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”.
In his press conference, Jerome Powell considered that rates are at the peak of this tightening cycle and did not rule out the possibility that they could remain elevated if necessary. The overall message focused on the FED needing further evidence that inflation is consistently heading towards its target, and he was positive about the results achieved over the last year, reaffirming the importance of carefully assessing economic developments before making future decisions.
Expectation for Federal Funds Rate
Source: AllianceBernstein