The Federal Reserve last night raised the target range for the federal funds rate by 50 basis points to 4.25-4.5 percent, rounding off a cumulative tightening of 425 basis points this year.
With the Fed’s decision on rates widely expected given the strong forward guidance towards a downshift in the pace of tightening from officials, the initial market impact was driven by measures of forward guidance provided by the US central banks. The terminal rate - the rate at which the Fed is expected to stop increasing interest rates - now is above 5 percent.
Following the Fed’s decision, US stocks closed lower, with the Dow Jones declining 0.4 percent and the S&P 500 0.6 percent. The Nasdaq shed 0.8 percent.
In the statement, the Fed said that “further increases in the target range will be appropriate.” Monex Europe, in a note to investors, said this contrasts with the end of the 2005 and 2018 hiking cycles, when the statements used softer language that “some further” policy tightening would be warranted.
Rate cuts expected in 2024
Additionally, FOMC members upgraded their assessment of rates for 2023 from 4.625 percent to 5.125 percent, suggesting a further 75 basis points of hikes is the base case for most policymakers next year.
Further out in the forecast horizon, Monex said that the Fed’s median dot reflects expectation of 100 basis points of rate cuts in 2024 to 4.1 percent, up from 70 basis points of 2024 cuts expected in September to a rate of 3.9 percent, while the policy rate is expected to remain above the Fed’s measure of neutral until the end of 2025.
Monex said that these changes essentially follow previous commentary from Fed officials, who have said in recent weeks that policy would have to remain in restrictive territory for an extended period of time in order to return inflation back to target.