Federal Reserve keeps rates at 22-year high but hints at cuts to come

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The Federal Reserve on Wednesday held interest rates at a 22-year high, but most officials forecast that the US central bank would implement 75 basis points worth of cuts next year.

The unanimous decision from the Federal Open Market Committee extends a pause in monetary policy moves that has been in place since July, leaving the federal funds rate at 5.25 per cent to 5.5 per cent.

But new economic projections from individual central bank officials suggested they saw greater scope for the Fed to lower interest rates next year than in previous projections.

The so-called dot plot showed that most officials expected rates would end next year at 4.5-4.75 per cent, suggesting the Fed would make three quarter-point cuts from current levels. The dot plot showed expectations for rates to fall even lower in 2025, with most officials forecasting rates would end up between 3.5 per cent and 3.75 per cent.

Expectations for a steeper pace of rate cuts next year triggered a rally in US stocks and sharp fall in Treasury yields, with the two-year yield recording its biggest daily decline since the collapse of Silicon Valley Bank in March.

In a statement, the Fed spelt out the conditions under which it would consider “any additional policy firming that may be appropriate to return inflation to 2 per cent over time” — softer language that suggests the central bank may not see a further need to raise rates again.

Speaking at a press conference, Jay Powell, Fed chair, said the inclusion of the word “any” reflected a view that the policy rate was “likely at or near its peak for this tightening cycle”. He also added that while officials “do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table”.

Powell reiterated that the central bank was committed to proceeding “carefully”…