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United States Monetary Policy December 2023

United States: Fed keeps rates unchanged in December

At the meeting ending on 13 December, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate at 5.25%–5.50% for the third straight meeting.

The decision was driven by the Fed’s desire to assess the impact of past rate hikes, which total 525 basis points since early 2022. Price pressures have come down sharply so far this year, meaning there was no need to continue hiking. On the flipside, with both headline and core inflation still both above the Fed’s 2.0% target range, it was premature to begin monetary easing.

Looking ahead, the Fed’s own projections are for the midpoint of its federal funds rate range to end 2024 at 4.6%, compared to 5.1% in its previous forecasts made back in September. This is broadly in line with the forecasts of our panelists, which are for the upper bound of the federal funds rate range to be around 4.6% by end-2024. That said, the discrepancy among panelists is wide: the spread between the minimum and maximum policy rate forecasts for end-2024 is 275 basis points.

On the latest meeting and outlook, DBS’ Taimur Baig said:

“Unless activities and inflation slow drastically, Fed policy is likely to remain on hold in 1H24, in our view. Although market pricing has shifted the first cut to March 2024, we will hold on to our call for first cut to be in July. We think quantitative tightening will continue at least till then.”

United Overseas Bank’s Alvin Liew sounded slightly more dovish:

“We keep our projections for the FFTR to remain unchanged and continue to expect the Fed to maintain its current FFTR at 5.25-5.50% through mid-2024 where we price in 75bps of rate cuts for 2024 (i.e. three 25-bps cuts, one each in Jun 2024, 3Q24 and 4Q24 respectively.”

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