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Federal Reserve Nears Victory Against Inflation, Eyes Possible Rate Cuts in 2024

After nearly a two-year battle against high inflation, the Federal Reserve is expected to hold interest rates steady at its meeting on Wednesday, maintaining the range of 5.25% to 5.5%, the highest level in 22 years. While minor changes to the policy statement are anticipated, Wall Street is keenly awaiting the new quarterly economic projections, which may include a forecast for the key rate at the end of 2024.

Despite signs of cooling inflation, Fed Chairman Jerome Powell is expected to remain cautious, emphasizing the need to keep interest rates elevated until convinced that inflation has returned to the central bank’s 2% target. Powell has recently downplayed declines in consumer prices, asserting that it is premature to conclude with confidence that a sufficiently restrictive stance has been achieved.

While the central bank’s recent hawkish stance indicates a preparedness to tighten policy further, many investors anticipate rate cuts in 2024 amid signs of economic cooling. Analysts from institutions like Bank of America, UBS, and Deutsche Bank predict rate cuts as early as March or as late as July. The market, however, may be ahead of the likely pace of cuts, according to Solita Marcelli, CIO for the Americas at UBS Global Wealth Management, who expects two to three cuts next year, potentially starting in July.

In recent months, inflation has moderated, but it remains elevated at 3.2% compared to the same period a year ago. Despite the Fed’s efforts to raise rates sharply over the past year, with 11 rate increases, policymakers are now assessing whether further tightening is needed. New York Fed President John Williams has indicated that the peak level of the target range for the federal funds rate may have been reached, suggesting a commitment to a restrictive stance to fully restore balance and bring inflation back to the 2% longer-run goal.

The tightening of monetary policy has impacted various sectors, including pushing the average rate on 30-year mortgages above 7%, marking a significant shift in borrowing costs for consumers and businesses. As the Fed navigates the delicate balance between controlling inflation and supporting economic growth, the prospect of rate cuts in 2024 remains a key focus for investors and market observers.

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