Federal Reserve officials left interest rates unchanged in their final policy decision of 2023 and forecast that they will cut borrowing costs three times in the coming year, a sign that the central bank is shifting toward the next phase in its fight against rapid inflation.
Interest rates are set to a range of 5.25 to 5.5 percent, where they have been since July. After making a rapid series of increases that started in March 2022 and pushed borrowing costs to their highest level in 22 years as of this summer, officials have held policy steady for three straight meetings.
That patient stance has given policymakers time to assess whether interest rates are high enough to weigh on the economy and ensure that inflation will slow to the Fed’s 2 percent target over time — and increasingly, slowing inflation and a cooling job market have convinced them that policy is in a good place. Jerome H. Powell, the Fed chair, said during his news conference Wednesday that officials no longer expected to raise interest rates again.
In fact, Fed policymakers projected on Wednesday that they would lower borrowing costs to 4.6 percent by the end of 2024, down notably from their previous 5.1 percent estimate, which was released in September. The forecast implies that officials will make three quarter-point rate cuts next year.
Markets cheered as Fed policymakers painted an optimistic vision of a lower-rate future. The S&P 500 index shot higher following the Fed’s policy decision and continued to climb as Mr. Powell spoke, yields on key government bonds fell, and investors increasingly bet that the Fed could cut rates as soon as March.
Mr. Powell avoided declaring victory over inflation and steered clear of commenting on when rates cuts might start or what criteria would warrant them. Still, he struck a sunny tone during his news conference, celebrating recent progress on inflation and expressing cautious hope that it might continue slowing without causing serious economic pain.
“Inflation has eased from its highs, and this has come without a significant increase in unemployment — that’s very good news,” Mr. Powell said, even as he emphasized that “the path forward is uncertain.”
Inflation has surprised officials before by speeding back up after slowing down, and policymakers made clear on Wednesday that they could still raise rates if prices unexpectedly jumped.
“Participants didn’t write down additional hikes,” Mr. Powell said. “Participants also didn’t want to take the possibility of further hikes off the table.”
But even with that caveat, the overall message was that “they’re feeling much better about the policy setting, and plotting a course for reducing rates next year,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. He said he thought the Fed could move toward laying out what would warrant rate cuts as soon as January.
The call for lower rates was widespread, based on the announcement on Wednesday: Not a single Fed official expected interest rates to be higher at the end of next year.
That shift in outlook has come as the American economy makes long-awaited and meaningful progress toward slower price increases.
Americans have been contending with rapid inflation ever since prices began to rise quickly in early 2021. Costs initially jumped as global supply chains snarled and shortages surfaced for products including cars and furniture. Inflation was then exacerbated by a pop in fuel and food costs following Russia’s 2022 invasion of Ukraine.
Those big shocks collided with strong demand: Households had saved a lot of money during the pandemic, partly as they received relief payments from the government. As they spent enthusiastically, companies had the wherewithal to raise prices without scaring away customers. Firms themselves started to pay more as they tried to lure workers in a strong labor market with far more job openings than available applicants.
That is where Fed policy came in. The central bank rapidly lifted borrowing costs starting last year — even making a series of jumbo three-quarter point increases — to make it more expensive to borrow to buy a house, finance a car purchase or rack up credit card debt. The goal was to cool demand and weaken the booming labor market.
In recent months, a combination of supply chain healing and slightly weaker demand have combined to start bringing inflation down meaningfully. Data this week showed overall consumer price increases slowing to 3.1 percent in November, down sharply from 9.1 percent at the peak in the summer of 2022.
The November edition of the Fed’s preferred inflation measure, which is different but related and comes out at more of a delay, is scheduled for release on Dec. 22.
Fed officials have also been heartened to see that the job market is cooling. Job openings are down notably and employers are hiring at a robust but no longer white-hot pace. As supply and demand for workers comes into balance, wage gains have been slowing.
Officials think that more modest pay gains could pave the way for slower price increases in services — nonphysical purchases like haircuts and rent — which have taken over from goods as the major driver of inflation.
Historically, efforts to lower inflation by slowing demand sharply have ended in a recession. But officials are increasingly hopeful that this time might be different.
The Fed’s economic projections released Wednesday showed that policymakers expect inflation to return to 2 percent by 2026. They also showed that officials still expect unemployment to climb slightly, reaching 4.1 percent next year, as growth slows but remains positive.
That would be a big win for the Fed, especially considering that many forecasters were predicting an impending recession as recently as late this spring and early this summer.
Mr. Powell reiterated that he has “always” seen a path toward slowing inflation without causing a lot of economic pain, and noted that the economy does seem to be making progress toward what economists call a “soft landing” as the job market remains strong and inflation cools.
“Inflation keeps coming down, the labor market keeps getting back into balance,” Mr. Powell said Wednesday. “It’s so far, so good, although we kind of assume that it will get harder from here, but so far, it hasn’t.”
— Joe Rennison contributed reporting.