WASHINGTON (AP) 鈥� The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, and its officials signaled that they expect to make three quarter-point cuts to their benchmark rate next year.
The Fed鈥檚 message Wednesday strongly suggested that it is finished with rate hikes 鈥� after the fastest increases in four decades 鈥� and is edging closer to cutting rates as early as next summer.
Speaking at a news conference, Chair Jerome Powell said that Fed officials are likely done raising rates because of how steadily inflation has cooled.
"Inflation keeps coming down, the labor market keeps getting back into balance and, it鈥檚 so far, so good,鈥� Powell said after the Fed鈥檚 19-member policy committee ended its latest meeting.
On Wall Street, traders celebrated the prospect of lower rates ahead. Stock prices soared and bond yields sank after the Fed issued its statement and Powell held his news conference.
Wednesday marked a major shift in the central bank's outlook on interest rates and the economy. Just , Powell had said it was 鈥減remature鈥� to conclude that the Fed has finished raising its key benchmark rate or to 鈥渟peculate鈥� about cuts in that rate.
But on Wednesday, he signaled that the Fed is almost certainly done raising rates. And he acknowledged that the officials had discussed the prospect of rate reductions in their meeting.
He also conceded that his warning, in a high-profile speech last year, that the 鈥減ain鈥� of higher unemployment would accompany a sharp decline in inflation, was overly pessimistic. Instead, inflation has slowed significantly toward the Fed's 2% target, even while unemployment, at 3.7%, and the pace of layoffs, have remained low.
In response to a question, Powell said the Fed recognizes that keeping rates high for too long, and waiting too long to cut them, could endanger the economy.
鈥淲e鈥檙e aware of the risk that we would hang on too long鈥� before reducing borrowing rates, the Fed chair said. 鈥淲e know that鈥檚 a risk, and we鈥檙e very focused on not making that mistake.鈥�
Diane Swonk, chief economist at KPMG, said she thought the Fed's message Wednesday was: 鈥淲e're done.鈥�
The Fed, she said, has the 鈥渓uxury鈥� of leaving rates elevated, for now, in case the economy and inflation reaccelerate, 鈥渨hile declaring that they鈥檙e done hiking, and that cuts are in the making."
Wall Street investors are betting that rate cuts could begin as soon as March, while economists generally foresee them beginning in May or June.
Throughout his news conference, Powell expressed optimism that inflation, which has bedeviled American consumers and businesses for more than two years, is edging down toward the Fed鈥檚 2% target. He noted, by example, that inflation has eased in goods, housing and services 鈥� three categories the Fed has been closely monitoring.
The Fed chair downplayed 鈥� that the final step down to 2% inflation, from its current level of about 3%, could be harder than the previous slowdowns in price increases.
鈥淲e kind of assume that that it will get harder from here," he said. 鈥淏ut so far it hasn鈥檛.鈥�
The Fed kept its benchmark rate at about 5.4%, its highest level in 22 years, a rate that has led to much higher costs for mortgages, auto loans, business borrowing and many other forms of credit. Higher mortgage rates have sharply reduced home sales. Spending on appliances and other expensive goods that people often buy on credit has also declined.
Conversely, interest rate cuts by the Fed, whenever they happen, would reduce borrowing costs across the economy. Stock prices could rise, too, though share prices have already rallied in expectation of rate cuts, potentially limiting any further increases.
So far, the Fed has achieved what few observers had thought possible a year ago: Inflation has tumbled without an accompanying surge in unemployment or a recession, which typically coincide with a central bank鈥檚 efforts to cool the economy and curb inflation. Though inflation remains above the Fed鈥檚 2% target, it has declined faster than Fed officials had expected, allowing them to keep rates unchanged and wait to see if price increases continue to ease.
On Wednesday, the Fed鈥檚 quarterly economic projections showed that its officials envision a 鈥渟oft landing鈥� for the economy, in which inflation would continue its decline toward the central bank鈥檚 2% target without causing a steep downturn. The forecasts showed that the policymakers expect to cut their benchmark rate to 4.6% by the end of 2024 鈥� three quarter-point reductions from its current level.
A sharp economic slowdown could prompt even faster rate reductions. So far, though, there is no sign that a downturn is imminent.
In its quarterly projections, the Fed's policymakers now expect 鈥渃ore鈥� inflation, according to its preferred measure, to fall to just 2.4% by the end of 2024, down from a 2.6% forecast in September. Core inflation, which excludes volatile food and energy costs, is considered a better gauge to inflation鈥檚 future path.
The policymakers foresee unemployment rising to 4.1% next year, from its current 3.7%, which would still be a low level historically. They project that the economy will expand at a modest 1.4% next year and 1.8% in 2025.
One reason the Fed could be able to cut rates next year, even if the economy plows ahead, would be if inflation kept falling, as expected. A steady slowdown in price increases would have the effect of raising inflation-adjusted interest rates, thereby making borrowing costs higher than the Fed intends. Reducing rates, in this scenario, would simply keep inflation-adjusted borrowing costs from rising.
The Fed is the first of several major central banks to meet this week, with others also expected to keep their rates on hold. Both the European Central Bank and the Bank of England will decide on their next moves Thursday.
Christopher Rugaber, The Associated Press
