Washington, DC
CNN
 — 

The Federal Reserve is expected to announce Wednesday that it will keep its key interest rate steady at a 22-year high for the third time in a row. Central bank officials will also release a fresh set of economic projections, likely showing inflation cooling faster than previously estimated and an additional rate cut next year, or more.

The Fed’s post-meeting statement could also suggest that the central bank isn’t leaning toward hiking again, specifically by nixing the usual “additional policy firming” phrase, though that change could also come at a future meeting.

Fed Chair Jerome Powell is expected to throw some cold water on the possibility of rate cuts beginning in just a few months, reiterating that more hikes remain on the table. He tried doing so earlier this month.

“Having come so far so quickly, the [Fed] is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” Powell said during a discussion in Atlanta. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”

But any additional rate increases aren’t reflected in futures. Stocks rallied after Powell’s hawkish comments in Atlanta. Indeed, investors are already looking ahead to the Fed cutting rates sometime next year, but when rate cuts begin remains unclear. Markets are currently pricing in a roughly 40% chance of that first rate cut coming in March.

The Fed lowers its key federal funds rate for two main reasons; because unemployment is rising due to a weakening economy, or simply because there is no reason to keep interest rates elevated at a “restrictive” level, if it’s clear that inflation is under control. In the latter scenario, with inflation slowing and rates unchanged at a high level, that would mean that inflation-adjusted, “real” interest rates are rising, unnecessarily constraining the economy.

Fed officials’ latest economic projections released in September showed that they will begin to lower interest rates sometime next year. But it remains unclear as to when rate cuts will ultimately begin and how many times the Fed will cut in 2024. Economists’ estimates around rate cuts vary.

“The Fed is feeling increasingly comfortable that the economy, jobs and inflation are all moving in the right direction, consistent with the current federal funds rate,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.

“But futures markets are anticipating a lot of cuts next year, beginning in March. That’s probably overly aggressive from the Fed’s point of view, so Powell may try to guide markets back to less aggressive rate cuts next year,” he said.

Whether a deteriorating economy or inflation’s defeat elicits rate cuts next year is anyone’s guess.

And with markets already sending clear signals on rate cuts, Fed officials might be discussing that during their ongoing policy meeting, which began on Tuesday.

“Powell is going to get asked whether or not they discussed rate cuts at this meeting, and that’s going to be one of the hardest things for him to navigate,” Diane Swonk, chief economist at KPMG, told CNN.

“We’ll see it in the minutes, but he has to admit if they did. He’s pretty good at corralling the cats ahead of time, so my guess is that he says he will hold off on any rate cut discussions until January,” she added.

It’s also not just Powell pooh-poohing the rate cuts discourse.

“I’m not thinking about rate cuts at all right now,” San Francisco Fed President Mary Daly told a German newspaper last month. “I’m thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability.”

Inflation remains a pesky problem for the Fed.

Price increases slowed slightly in November, as underlying inflationary pressures persisted, according to the Labor Department’s latest Consumer Price Index released Tuesday.

CPI rose 3.1% in November from a year earlier, a touch lower than October’s 3.2% rise and still above the Fed’s 2% target. Meanwhile, the core measure excluding volatile food and energy prices rose 4% in the 12 months ended in November, the same as October.

Still, the latest CPI reflects a substantial improvement from when it reached a four-decade high in June 2022. The Fed’s preferred inflation gauge has shown the same steady progress over the past year.

The final mile of the Fed’s inflation fight could be the most difficult, possibly requiring the economy to cool further, and Powell and other Fed officials have said as much.
Economic growth has already slowed dramatically from its breakneck pace in the third quarter.

The Atlanta Fed is currently projecting fourth-quarter GDP to register at an annualized 1.2% rate, a sharp pullback from the third quarter’s red-hot 5.2%.

The job market has also slowed markedly, at least compared to the robust years of 2021 and 2022. Employers added 199,000 jobs in November as the unemployment rate edged lower to 3.7% that month. That’s above the minimum number of monthly job gains — somewhere between 70,000 and 100,000 — needed to keep up with population growth.

Overall, the US economy remains resilient, steering clear of a recession so far, instead raising even more hopes that the Fed could pull off a soft landing — a situation in which inflation slows without a sharp rise in unemployment.

But a soft landing still isn’t guaranteed.

“We are seeing evidence that the economy has already essentially achieved a soft landing, if you look at three-month or six-month averages,” Gregory Daco, chief economist at EY-Parthenon, told CNN. “The key question now is whether there is a sufficiently long and stable runway through 2024 where we avoid that long-feared recession.”