Key Takeaways From the Fed’s Interest Rate Decision

The Federal Reserve took a pass again Wednesday on raising interest rates, giving consumers a much-needed breather from rising credit card and mortgage costs.

It last raised its key rate in July and has since held it steady at a 22-year high of between 5% and 5.25%. Changes to the rate impact borrowing costs for just about everyone: consumers, corporations and even the federal government.

Wall Street economists and traders build entire careers on reading the tea leaves in the Federal Open Market Committee's statement and Chair Jerome Powell's Q&A with reporters after the decision is released.

We pulled together a crib sheet on today's rate decision and Powell's press conference for people who don't talk in Fed speak.

The US Economy Will Slow

The Fed wants the economy to grow, but not so hot that inflation takes off, and not too slow to trigger a recession.

It's predicting that growth (as measured by the gross domestic product) in the U.S. economy will slow from an annualized rate of 2.6% this year to 1.4% next year.

Inflation

Inflation is still too high for the Fed's liking. FOMC policymakers are trying to get inflation down to 2%. Tuesday's report on the Consumer Price Index, which broadly measures inflation, showed it running at an annualized rate of 3.1% in November. That's down from a peak of 9.1% in June 2022. It's moving in the right direction, but isn't quite where the Fed wants it.

“Inflation has eased from its highs," Powell said. "But inflation is still too high, ongoing progress in bringing it down is not ensured, and the path forward is uncertain."

The Fed estimates that inflation — as measured by the Core Personal Consumption Expenditures Index that excludes volatile food and energy prices — will fall to 2.4% next year from 3.4%.

Will the Fed Raise Rates Again?

That's unclear but increasingly less likely as inflation cools.

Wall Street certainly thinks the Fed is done raising rates, betting a 48% chance the central bank will cut rates by a quarter percentage point by March and about an 80% chance by May, according to the CME FedWatch Tool, which is based on Fed Funds futures trading.

But the Fed left the door open to more hikes if needed:

In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Translating that into layman's terms, "policy firming" is Fed speak for raising rates. The "cumulative tightening of monetary policy" is the 11 rate hikes it's made since March 2022. "The lags with which monetary policy affects economic activity and inflation" just means that it takes a while for a change in the Fed's key interest rate to fully filter through the economy and cool inflation.

Altogether, the Fed is saying it wants to wait and see whether the 11 rate hikes it's already done are enough to get inflation down to 2% before it changes interest rates again, and that may take some time.

Good News in the Dot Plot

The Fed's much-watched "dot plot" graph, which can be found on page four here, is released quarterly. It gets its name from the dots plotted out on a graph indicating where Fed members think interest rates will head in the future. Wednesday's dot plot graph showed that a majority — 16 of 19 — see interest rates falling next year.

Fifteen of them believe rates will drop to between 4.25% and 4.75% with one outlier seeing rates dropping to as low as 3.75%. Not one thinks rates will rise next year.

"We are likely at or near the peak rate for this cycle," Powell said in explaining the dot plot. "Participants didn't write down additional hikes that we believe are likely, so that's what we wrote down. But participants also didn't want to take the possibility of further hikes off the table."

Recession Risks

There was nary a mention of recession in the Fed's statement or accompanying 17-page summary of economic predictions. The Fed is striving for a "soft landing," that sweet spot of slowing economic growth enough to curb inflation without triggering a recession.

It's a tricky feat, and one that many Fed watchers were doubtful could be done. A year ago, most economic forecasters were predicting a recession this year, Powell noted. "Not only did that not happen, we actually had a very strong year," he said.

There's always the possibility of a recession in the next year, he noted. That said, the Fed has been able to bring inflation down without the big job losses usually seen ahead of a recession so far.

"It is it is far too early to declare victory. And there are certainly the risks. It's certainly possible that the economy will behave in an unexpected way; it has done that repeatedly in the post-pandemic period," Powell said. "Nonetheless, where we are is we see the things that I mentioned," he said, referring to being able to cool inflation without triggering a recession.