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Federal Reserve Signals End to Rate Hikes, Eyes Future Cuts Amid Economic Growth

Jerome Powell, the Chair of the Federal Reserve, announced the conclusion of the current phase of monetary tightening on Wednesday, with the central bank's decision to keep interest rates unchanged marking the end of its campaign to elevate borrowing costs.

During a press briefing following the year's inaugural meeting of the Federal Reserve's decision-making body, Powell stated, "We have reached the summit of interest rate increases in this cycle."

This recent resolution keeps the Federal Reserve's primary lending rate steady, marking the fourth consecutive session where the board chose to maintain the rate, which currently stands between 5.25% and 5.5%—the highest it has been in 22 years. The decision was reached with unanimous consent.

The Federal Reserve's official announcement highlighted that the U.S. economy continues to expand "steadily" and, despite a slight slowdown, job creation remains "robust." Recent data from the Commerce Department revealed that the economy grew at a 3.3% annual rate in the last quarter, surpassing the previous quarter's 4.9% growth rate and exceeding expectations, hinting at potential rate reductions ahead.

Powell, in his post-meeting news conference, suggested that if the economy evolves as anticipated under the tight monetary conditions, there might be room to "reduce the level of policy tightness" sometime in 2024.

However, he tempered expectations for an immediate rate cut by March, a prospect some investors had eagerly anticipated.

In terms of what would convince the Federal Reserve that inflation is moving sustainably towards the 2% goal, thus warranting a decrease in rates, Powell mentioned that the inflation metrics from the past six months were encouraging. Yet, he emphasized the need for continued positive data to assure the committee that inflation is under control.

Forecast updates from the committee's last gathering indicated an expectation for rate reductions totaling 75 basis points this year, although market speculation leans towards a more aggressive cut of 150 basis points or more in 2024.

The committee envisions the target rate settling at 4.6% by the end of 2024 and dropping to 3.6% by the end of 2025, adjustments that may disappoint some observers who anticipated more significant decreases next year.

Addressing inquiries about the possibility of a "soft landing," where the economy slows enough to curb inflation without causing a recession, Powell was cautious, stressing that the battle against high inflation is far from over.

Inflation indicators, such as the PCE price index, showed a decline to 2.6% in December, reaching its lowest point since March 2021, with the core index, a key inflation measure for the Fed, dropping to 2.9%. Despite these trends, the Fed remains wary of the persistence of service sector inflation above the general rate, with the "supercore" index (excluding housing) at 3.3% in December.

The resilience of the labor market, as evidenced by steady job growth and a low unemployment rate, continues to be a focal point for the Federal Reserve. Even as job creation moderates, the economy added 216,000 jobs in December, and job openings remain high at 9 million.

While Powell downplayed the immediate prospect of a soft landing, achieving such a scenario could positively impact the commercial real estate market in 2024, especially after a unique tightening cycle that saw significant value declines in this sector despite overall economic and employment strength.


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