Jerome Powell explains decision to hold interest rate steady, speaks on outlook

Federal Reserve Chairman Jerome Powell explains the decision to leave the policy rate, federal funds rate, unchanged at the range of 5.25-5.5% and responds to questions in the post-meeting press conference.

Follow our live coverage of the Fed's monetary policy announcements and the market reaction.

Fed meeting press conference key quotes

"It's not likely we will hike further."

"Policymakers are thinking, talking about when it will be appropriate to cut rates."

"We are seeing strong growth that appears to be moderation and inflation making real progress."

"We still have a ways to go."

"No one is declaring victory, that would be premature."

"We are not guaranteed of progress, so moving carefully in assessment of if we need to do more."

"The question of when it will be appropriate to cut rates is coming into view."

" I have always felt there was a possibility economy could avert recession while inflation came down, and so far that's what we are seeing."

"That said, this result is not guaranteed."

"We think we have done enough on rates but we are not fully confident in that view yet."

"Fair to say there is a lot of uncertainty still going forward."

"We will look at the totality of data when making policy decisions."

"We are very focused on not making the mistake of keeping rates too high too long."

"Both mandates are more in balance now."

"We will be looking hard at what's happening with demand."

"We haven't worked out if we will follow a threshold-based path for cutting rates."

"We have seen real progress on core inflation."

"We've seen reasonable progress in non-housing services inflation."

"Reason you wouldn't wait to 2% inflation to cut rates is it would be too late."

"You need to reduce restriction on economy well before 2%."

"At some point you will run out of supply-side help, and then it gets harder."

"We are not talking about altering the pace of QT."

"Balance sheet is working pretty much as expected."

"At a certain point reverse repo facility levels out and reserves will come down."

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This section below covers the market reaction to the Federal Reserve policy statement and the revised Summary of Projections.

The US Federal Reserve (Fed) announced on Wednesday that it left the policy rate, federal funds rate, unchanged at the range of 5.25%-5.5% following the December meeting. This decision came in line with the market expectation.

The revised Summary of Projections (SEP) showed that that Fed officials' median view of policy rate at the end of 2024 stood at 4.6%. 

Key takeaways from Fed policy statement

"Inflation has eased but remains elevated and FOMC remains strongly committed to returning inflation to 2% target."

"Data suggests economic activity has slowed from third quarter's strong pace."

"In determining the extent of any additional policy firming that may be appropriate, will take into account a range of economic factors."

"Job gains have moderated but remain strong and unemployment rate remains low."

"Tighter financial and credit conditions are likely to weigh on economic activity, hiring and inflation, but extent of effects remains uncertain."

"Will continue bond-holding reductions as previously planned."

Fed dot plot highlights

"Fed officials' median view of fed funds rate at end-2025 3.6% (prev 3.9%)."

"Fed officials' median view of fed funds rate at end-2026 2.9% (prev 2.9%)"

"Fed projections imply 75 basis points of rate cuts in 2024 from current level."

"Fed officials' median view of fed funds rate in longer run 2.5% (prev 2.5%)"

"No policymaker sees end-2024 policy rate above current level."

"Fed projections show 8 of 19 officials see policy rate above 2024 median, 5 see it below that."

"Fed officials see inflation at 2.4% in 2024, returning to 2% target in 2026."

"Fed policymakers see weaker GDP growth, the same unemployment rate in 2024 compared with September projections."

Market reaction to Fed policy decisions

The US Dollar (USD) came under heavy selling pressure with the immediate reaction. The USD Index was last seen losing nearly 0.5% on the day at 103.35.

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This section below was published at 11:00 GMT as a preview of the Federal Reserve's monetary policy decisions.

• The Federal Reserve is expected to keep rates on hold for a third consecutive meeting.
• Fed Chairman Jerome Powell will likely repeat decisions will be made meeting by meeting.  
• The US Dollar paused its advance ahead of the event and looks poised to extend gains.

The Federal Reserve (Fed) will announce the last monetary policy of 2023 on Wednesday, and market participants widely anticipate policymakers will leave the policy rate unchanged at 5.25%-5.5%. If that’s the case, it would be the third consecutive meeting the central bank refrains from acting after lifting rates to the highest level in over two decades in a little over a year. 

The announcement will be complemented by the release of the Summary of Economic Projections (SEP) prepared by the Federal Open Market Committee (FOMC). According to September projections, FOMC participants expect PCE inflation to fall from 3.3% by the end of 2023 to 2.2% by the end of 2025. 

However, officials still saw the Fed funds rate peaking at 5.6% this year, unchanged from the previous June projection, suggesting that there is still a 25 basis points (bps) rate hike on the table. Additionally, officials upwardly reviewed their growth projections for this year and the next, and anticipate two rate cuts in 2024, fewer than those projected in June, putting the funds' rate at 5.1%.

Finally, Fed members made it clear that they intend to keep rates higher for longer, while speculative interest believes the tightening cycle is done and bet on a potential rate cut as soon as in Q2 2024. 

Economists at Citibank anticipate a dovish announcement, as they don’t expect the FOMC to deliver the last rate hike anticipated in the previous meetings.  

“We expect that the Fed will revise their 2023 core PCE inflation lower and given that officials did not deliver the last hike they had anticipated in 2023, it is likely that the 2024 and 2025 median dots in the SEP move lower by 50 bps to 4.625% and 3.375%, respectively. The 2024 dot would then imply 75 bps of cuts in total for 2024, more than what the dots were showing in September. During the press conference Chair Powell will likely say that it is premature to speculate about cuts and that the Committee will decide meeting by meeting if it needs to hold rates steady or to raise the policy rate.” 

When will the Fed announce policy decisions and how could they affect EUR/USD?

The Federal Reserve is scheduled to announce its decision and publish the monetary policy statement at 19:00 GMT. This will be followed by Chairman Jerome Powell's press conference at 19:30 GMT. As said, the most likely scenario is that policymakers will opt to keep interest rates unchanged. 

The central bank argued previous rate hikes need time to take effect, explaining the ongoing “pause” in rate hikes. However, there is an underlying reason: higher rates come with an increased risk of an economic downturn. Growth in the country has proved resilient, yet policymakers are well aware at least a soft landing is around the corner. Additional hikes, however, could trigger a recession.

Meanwhile, inflation has eased sharply from the records achieved in mid-2022, but it is still above the central bank’s 2% goal. The November Consumer Price Index (CPI) printed at 3.1% YoY, while the core annual reading remained steady at 4%. Also, the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge, rose 3.5% on a year-over-year basis in October.

The latest CPI figures were not enough to spur speculation of a potential rate hike in the docket but weighed on the market’s speculation about potential rate cuts through 2024. 

On the one hand, the median projection of the Fed's most recent interest rate dot plot chart puts the Federal Funds Rate at 5.1% at the end of 2024, a measly 25 bps rate cut in twelve months. On the other hand, speculative interest foresees between 100 and 120 bps on cuts spread through the year.

That means that an on-hold decision will hardly affect financial markets, but the dot-plot will set the tone. Investors will be looking for clues on what the Fed could pivot, something officials refrain from providing so far. 

Valeria Bednarik, Chief Analyst at FXStreet, explains: “The US Dollar could react to sentiment instead of news. If policymakers are optimistic about growth and easing inflation, while reducing their perspective for the Fed’s funds rate from 5.1% for 2024, risk appetite may come in fashion. Stock markets and high-yielding assets could appreciate against the USD. The opposite scenario will be less concerning, as investors are well aware of Fed officials' ‘higher-for-longer’ mantra and will not be completely disappointed if officials fail to put something new on the table.”

Regarding EUR/USD, Bednarik adds: “The EUR/USD pair is in a corrective decline after advancing between September and November, and so far, met buyers around the 50% retracement of the 1.0447-1.1016 rally at 1.0732. The 61.8% Fibonacci retracement stands not far below it, at 1.0666, a bearish breakout point. Once below it, the case for a steep decline towards 1.0500 becomes stronger.”

Finally, Bednarik notes that “beyond the weekly peak at 1.0820, EUR/USD can recover towards the 1.0900 level, although gains beyond the latter seem unlikely at the time being.”