In their final policy decision of 2023, Federal Reserve officials left interest rates unchanged. The decision was unanimous amongst committee members and concludes a remarkable year for the economy and Federal Open Market Committee. Policymakers kept the benchmark rate steady for the third consecutive time while setting the stage for potential rate cuts in 2024. 

Looking back to the beginning of the restrictive rate hike cycle (March 2022), most Fed officials and market strategists predicted a much slower economy and higher unemployment as policymakers fought against inflation and pushed the Federal Funds rate to its highest level in more than 22 years. However, the economy and labor markets have proved to be resilient as inflationary pressures have significantly moderated and continue to trend down towards the Fed’s preferred 2% target. “Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news.” said Fed Chair Jerome Powell during his press conference and after the policy announcement. 

While the Fed is reluctant to declare victory, their policy decision and summary economic projections strongly indicate their restrictive policy and rate hiking cycle is over. Markets celebrated the news as bond yields declined and equity markets rallied.  As the central bank begins to shift towards its next phase, future policy decisions will be determined by the economic data. Striking the balance will be challenging for the Fed and policymakers – between keeping the economy on a soft landing (avoiding recession) and achieving their dual-mandate of maximum employment and stable prices. So far, the Fed has been able to thread this needle and markets have an optimistic view of a lower interest rate future.    


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