The forecast is another hopeful sign that the U.S. economy might conquer inflation without a recession or a sharp rise in joblessness.
Federal Reserve officials on Wednesday suggested that victory over inflation is within sight, signaling that they are likely done raising interest rates and that borrowing costs will go down somewhat next year.
Members of the central bank's rate-setting committee agreed to hold their main policy rate steady in their last vote of the year, a reflection of mounting data showing that price spikes continue to cool. In a sign of growing optimism that inflation is largely under control, Fed policymakers even went as far as penciling in three rate cuts for 2024.
The Fed's preferred inflation gauge rose 3 percent over the 12 months ending in October, and officials projected it would fall to 2.8 percent by the end of the year, inching closer to their 2 percent target.
Fed Chair Jerome Powell told reporters in a press conference after the decision that he said he and his fellow officials don’t expect to need to raise borrowing costs more but “don't take that possibility off the table.”
“The lower inflation readings over the past several months are welcome, but we will need to see further evidence to build confidence that inflation is moving down sustainably toward our goal,” he said.
The move is another hopeful sign that the U.S. economy might conquer inflation without a recession or a sharp rise in joblessness, a potential boon to President Joe Biden as he seeks reelection.
Asked about the possibility of a recession and much higher unemployment, Powell said: “That's not something we're hoping to see, obviously.” In contrast, more than a year ago, the Fed chief warned of “pain” that would likely be inflicted on the economy.
Still, holding rates at punishing levels will continue to bite into economic activity. As inflation has fallen, investors have speculated intensely on when the central bank might begin to lower rates from their current setting, designed to actively slow the economy in an effort to tame rising prices.
Powell himself acknowledged rate cuts would come before the Fed reaches its 2 percent target to avoid unnecessarily tanking the economy. He said the institution was aware of the risks of keeping rates too high for too long, adding: “We're very focused on not making that mistake.” But Fed officials want to feel confident that inflation is on its way back to 2 before they ease off.
In new projections released Wednesday, Fed policymakers said they expect to lower rates next year. The committee was split on how much they might need to cut, with the majority expecting their main policy rate to end 2024 somewhere between a half a percentage point and a full percentage point lower than where it is now. That rate is currently set between 5.25 percent and 5.5 percent.
Fed officials also expect joblessness to rise slightly to 4.1 percent next year from 3.7 percent, where it stands now, though that would still be a very low unemployment rate by historical standards.
They also see their preferred inflation measure, the personal consumption expenditure index, falling to 2.4 percent next year.
“I welcome the progress” so far, Powell said. “I’m not calling into question the progress. We just need to see more.”
