Navigating Economic Crossroads: Fed's Response to Robust Jobs and Lingering Inflation
In its recent release, the Federal Reserve has decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Federal Reserve's decision to keep interest rates unchanged was widely expected by the markets, potentially marking the end of an 11-hike cycle that had pushed the fed funds rate to its highest level in over two decades. In response to the decision, the Dow Jones Industrial Average surged by more than 300 points, possibly setting the stage for a record closing on Wednesday. The FOMC's "dot plot" suggests the possibility at least three quarter-point rate cuts for 2024 potentially bringing the fed funds rate to a range of 2 percent to 2.25 percent.
Source: Federal Reserve Bank of New York (chart reflects the midpoint of the Federal Reserve's target)
In the release the Federal Reserve also provided a snapshot of the current economic landscape, revealing a slowing pace of economic activity and persistent concerns about inflation. The report highlights the resilience of the U.S. banking system in the face of tightening financial conditions.
According to the release, "Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. "This signals a noteworthy shift in economic momentum, as the robust growth seen in previous quarters has started to taper off.”
United States Core Inflation Rate (source: tradingeconomics.com)
Despite the moderation in job gains, the Federal Reserve emphasizes the strength of the labour market and the low unemployment rate. This provides some assurance regarding the overall health of the job market despite the economic slowdown.
United States Core Unemployment Rate (source: tradingeconomics.com)
One of the key takeaways from the release is the Federal Reserve's commitment to maintaining a sound and resilient banking system, even in the face of tighter financial and credit conditions. The release states, "Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain."
The next Fed Rate announcement is slated for January 31, 2024.
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