Powell Signals Peak Interest Rates, Foresees Cuts In 2024: Markets Rally, Traders Extend Lower Rate Bets

The Federal Reserve decided to leave its policy interest rate unchanged at its last meeting of 2023 Wednesday, as largely expected by market participants, with Fed Chair Jerome Powell acknowledging the current interest rate is “likely at or near the peak of this tightening cycle.”

After a cumulative increase of 525 basis points in interest rates since the beginning of the cycle, Powell said the Fed’s restrictive monetary policy stance is exerting “downward pressure on economic activity and inflation.”

The latest Summary of Economic Projections revealed that while Fed officials have raised their GDP growth estimates for this year, they anticipate a slowdown, with the median forecast dropping to 1.4% in 2024.

Fed Sees Rates Falling To 4.6% in ’24, 3.6% in ’25

Powell remarked that participants revised lower their outlook on interest rates. For the end of 2024, the median projection for the federal funds rate is 4.6%, with expectations adjusting downward to 3.6% by the end of 2025 and 2.9% by the end of 2026, signaling an anticipated 75 basis points in rate reductions for 2024.

The updated projections for the Fed’s rate path, although not fully aligned with market forecasts — which suggest cuts of up to 140 basis points in 2024 — appeared more dovish than many had predicted.

Powell brought rate reductions into the conversation, stating: “On rate cuts, that begins to come into view, and is now a topic of discussion.”

He praised recent economic indicators, including moderated growth, a rebalancing labor market and significant progress in controlling inflation. He confidently remarked that these developments do not support the notion of a current recession.

Is It Too Early To Declare Victory?

Taking a cautious stance on inflation, Powell emphasized that reducing inflation to 2% is a gradual process and its success is not guaranteed, asserting, “it’s far too early to declare victory.”

He further clarified the Fed’s readiness to tighten policy if needed, explaining the inclusion of “any” in the December statement as a signal that while the Fed believes the peak has been reached, the possibility of further hikes remains on the table.

When asked if growth surpassing expectations would lead to an adjustment in interest rates, Powell indicated that a robust labor market could intensify inflationary pressures, potentially decelerating progress toward the 2% inflation goal and necessitating an extended period of higher rates or a possible rate increase.

Regarding a scenario where the economy underperforms despite inflation not reaching the 2% objective, Powell suggested the Federal Reserve might have to “ease the constraints on the economy significantly ahead of achieving the 2% inflation target.”

Markets Anticipate First Fed Cut In March 2024, Gold Extends Rally

In the wake of the Fed’s new economic projections and Powell’s comments, the market has ramped up bets on a rate cut by March 2023, assigning a 70% probability. A cut by May is now almost fully priced in, according to the CME Group’s FedWatch tool.

Fed swap markets are forecasting over 140 basis points in rate cuts by the end of 2024, implying nearly six rate reductions by December 2024.

The initial market reaction triggered a rally in gold, tracked by the SPDR Gold Trust GLD; U.S. 20+ Year Treasuries TLT; and stocks, alongside a more than 1% drop in the U.S. dollar. The precious metal extended its rally, while momentum in bonds and stocks slightly eased.

Notably, U.S. blue-chip stocks in the Dow Jones index, as tracked by the SPDR Dow Jones Industrial Average ETF DIA, hit fresh all-time highs.