Fed Expects 75bps in Rate Cuts in 2024

Meeting Highlights:

  • As expected, the Fed left the fed funds target rate unchanged at 5.25% – 5.50%, matching the overwhelming market consensus.  The updated rate forecast, or dot plot, doesn’t have another rate hike penciled in for next year. In addition, 2024 rate cuts were increased from 50bps to 75bps, and the lack of the last rate hike forecast in September lowers the 2024 year-end rate to 4.625% from September’s 5.125% estimate. This more dovish take on 2024 rates has the Treasury market rallying across the curve.


  • Futures pricing prior to the announcement had the first rate cut fully priced in for the May meeting, and more than 100bps in cuts during 2024 with the funds rate at 4.17% by year-end. After the updated information, the market now has the first cut priced in for the March meeting and a total of 130bps in cuts during 2024 with the funds rate at 4.00%.


  • On inflation, the Fed reduced their 2023 core PCE forecast to 3.2% from 3.7% in September. We are currently at 3.5% as of October with market expectations at 3.4% for November (due Dec. 22). They lowered the 2024 forecast from 2.6% to 2.4% while reducing the 2025 forecast to 2.2% from 2.3%. This reflects the marginally better inflation data since the September meeting with continued improvement expected in 2024.


  • As for the labor market, the Fed’s new forecast is for the unemployment rate to tick up from 3.7% to 3.8% at year-end, same as the September year-end forecast.  Then, unemployment is forecast to climb to 4.1% in 2024 and 2025, same as the September forecast. The minimal increase in the unemployment rate forecasts is a recognition of the resilience of the labor market this year, with much of that resilience expected to remain in 2024.


  • On GDP, the Fed now has it at 2.6% for 2023 vs. 2.1% in the September forecast. The pace is expected to slow to 1.4% in 2024 and 1.8% in 2025, both are virtually unchanged from the September forecast. The 2024 and 2025 GDP projections continue to reflect the Fed’s belief in their soft-landing scenario. When the Fed first started projecting this outcome it was seen by many as wishful thinking, but as the year progressed market belief in a soft landing has increased as economic results have surprised to the upside and with the Fed now done with rate hikes.


  • Overall, the Fed delivered an as expected pause. But with no hike built into the forecast, and 75bps in rate cuts expected in 2024, the hawkish tone of previous meetings has turned into a dovish variety. To be sure, the higher-for-longer messaging may remain, so this meeting doesn’t represent a full pivot to easing mode, but it does signal the Fed is done with rate hikes and thus it becomes only a matter of the incoming data to determine when rate cuts will commence.


  • The press conference will afford Powell an opportunity to push back on the market’s more aggressive rate-cutting expectations. But given the improving inflation picture and moderating labor market, he may defer the harsh critique and return to the familiar strains of “data dependency”, ‘totality of the incoming information”, and “higher-for-longer” to guide future policy moves.


Official FOMC Statement




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Published: 12/13/23 Author: Thomas R. Fitzgerald