Fed Projections: Soft Landing in Sight

21 months after the Fed embarked on the most aggressive monetary tightening cycle in decades, it looks increasingly likely that the optimal outcome under the circumstances – bringing down inflation without inducing a recession and causing a significant increase in unemployment – can be achieved. With CPI inflation down to 3.1 percent in November, the unemployment rate still hovering below 4 percent and U.S. GDP on track to grow 2.5 percent this year, the often-quoted ‘soft landing’ is in sight, even though Fed Chairman Jerome Powell refuses to declare “mission accomplished” just yet.

There was still a new tone of cautious optimism in Powell’s press conference following the latest FOMC meeting on Wednesday. Having evaded questions about the possible end of rate hikes after the last meeting in early November, he now said that “the policy rate is likely at or near its peak for this tightening cycle,” adding quickly that the Fed would be prepared to tighten policy further if needed. As it stands, further tightening looks increasingly unlikely though, as rate cuts have come into view as the more likely scenario going into 2024.

According to the FOMC’s Summary of Economic Projections, the median projection for the appropriate level of the federal funds rate at the end of 2024 is now 4.6 percent, meaning that members of the Federal Open Market Committee are currently expecting three 0.25 percentage point rate cuts for next year, followed by further cuts throughout 2025 and 2026. Looking at the price index for personal consumption expenditure (PCE), FOMC members expect inflation to drop from 2.8 percent in the fourth quarter of this year to 2.4 percent in Q4 2024, 2.1 percent in Q4 2025 and return to its target level of 2.0 percent by the end of 2026. And while that could come at the cost of a slowdown in GDP growth in 2024 and beyond, meeting participants don’t expect a significant increase in unemployment for the next three years.