US Fed hints at three interest rate cuts… Dow exceeds 37,000 for the first time in history
The median interest rate at the end of next year is 4.5-4.75%, suggesting a 0.75% point cut next year. Powell says, “Discussions have begun on when to cut interest rates.”
The three major New York stock indexes hit 52-week highs, and the Dow exceeded 37,000 for the first time in history.
The U.S. central bank, the Federal Reserve (Fed), froze the base interest rate in line with market expectations on the 13th (local time), formalizing next year’s pivot (policy change) for the first time. The interest rate forecast for the end of next year was lowered by 0.75 percentage points from the current base rate, suggesting three interest rate cuts.
At the Federal Open Market Committee (FOMC) on this day, the Federal Reserve unanimously decided to maintain the base interest rate at 5.25-5.50%, eliminating the prospect of further interest rate increases for the first time since it began intensive tightening in March 2021.
Federal Reserve Chairman Jerome Powell said at a press conference, “FOMC attendees discussed the timing of interest rate cuts,” and “raising interest rates is no longer the default scenario,” formalizing the pivot to lower interest rates for the first time since March 2021.
The market cheered Chairman Powell’s remarks and the FOMC members’ dot plot, which turned to ‘dove’ (monetary policy easing) by a larger margin than expected. The major New York stock market indices rose by more than 1%, hitting a new high in 1952, and the Dow Jones Industrial Average exceeded 37,000 for the first time in history.
With the prospect of a large cut, “a sense of presidential election?” Questions too
The Federal Reserve has raised interest rates 11 times since March 2021 to 5.25-5.50%, the highest level since 2001. At the 8th FOMC meeting held this year, a total of 4 freezes were implemented until this month, following June, September, and November. Since the interest rate freeze was likely again this time, the market paid attention to the Fed’s Summary of Economic Outlook (SEP) ‘dot plot’, which was released for the first time since September. A dot plot refers to each FOMC member expressing his or her future interest rate forecasts by ‘dotting’ them and coming up with a median value.
This dot chart contains the forecast for a larger-than-expected reduction. The median interest rate forecast for the end of next year was 4.6% (4.5-4.75%), which is 0.75 percentage points lower than the current interest rate. It suggests three cuts of 0.25 percentage points each next year. In the September dot plot, the interest rate forecast for next year was 5.1% (5.0-5.25%), so the market was in fear of a prolonged period of high interest rates.
On the 1st of this month, Chairman Powell maintained a hawkish statement, saying, “It is still too early to speculate on the timing of the interest rate cut,” but at a press conference two weeks later, he said, “The interest rate cut was clearly the topic of today (FOMC meeting),” making a pivot. It was made official.
For this reason, the question was asked several times at the press conference, “Aren’t you mindful of next year’s U.S. presidential election?” Chairman Powell said, “The dot plot contains each individual’s thoughts and has nothing to do with politics. He denied this, saying, “We carry out the necessary policies for the economy,” and then added, “Unlike 60 to 90 days ago, an interest rate hike is no longer the default scenario,” depending on price developments.
In response to a question asking whether the reason for discussing interest rate cuts was ‘a slowdown in inflation or the need to stimulate the economy,’ he emphasized that it was a slowdown in inflation. Chairman Powell added, “This is because inflation expectations this year have fallen significantly compared to September.”
Chairman Powell also added that in the 12 months ending in November, the personal consumption expenditures (PCE) price index is estimated to have risen by 2.6%, and the core PEC price index is estimated to have risen by 3.1%.
He also suggested that an economic slowdown or recession is not a necessary condition for an interest rate cut. “It could be a sign that the economy is normalizing and that austerity measures are not necessary,” he said.