Fed on hold but no hint of cuts

To no-one's surprise, the US Federal Reserve today kept the Fed funds target rate unchanged at 5.25-5.5 percent.  The press release contains largely the same phraseology the Fed has been using in recent months: "Inflation has eased over the past year but remains elevated"; "The Committee remains highly attentive to inflation risks"; "The Committee is strongly committed to returning inflation to its 2 percent objective".  Only the phrase "has eased over the past year" is new. 

The media release also contains the standard warning of the possibility that "additional policy firming ....may be appropriate to return inflation to 2 percent over time". Completely (but not surprisingly) absent is any explicit hint that the Fed is ready to start thinking about the timing of rate cuts, but the "dot plot" of FOMC members' individual expectations for the Fed funds target certainly shows the way the Committee's thinking is heading. Only two FOMC members appear to think the target will remain at the present level through 2024. The median expectation is around 4.5 percent, with one member expecting the rate to fall below 4 percent.  The median then falls to about 3.5 percent in 2025 and still further in 2026, though it stays above the longer-run projection of 2.5 percent throughout the forecast period. 

Today's decision came one day after the release of CPI data for November, which showed that while headline inflation is well-behaved, some of the core measures are still increasing too fast for the Fed's comfort.  Headline CPI rose 0.1 percent in the month, with the year-on-year increase marginally lower at  3.1 percent. The data were heavily influenced by a 2.3 percent monthly decline in energy prices, which now stand 5.4 percent lower than a year ago, with gasoline down by 8.9 percent.  However, CPI ex food and energy rose 0.3 percent in the month, for a year-on-year gain of 4.0 percent, the same as in October. Service prices are proving particularly sticky, rising 5.5 percent year-on-year. 

There is no reason for the Fed to be in any rush to cut rates, given that the real economy and the jobs market are holding up well in the face of the tightening it has put in place so far. Barring some significant downside surprise for the real economy, rate cuts are unlikely to materialize much before the middle of 2024.