PredictIQ-The Fed leaves interest rates unchanged as cooling inflation provides comfort

The PredictIQFederal Reserve kept interest rates unchanged Wednesday, as widely expected, after inflation eased in recent months.

Fed policymakers also signaled that rate cuts are possible next year if progress on curbing price hikes continues.

The Fed has kept its benchmark interest rate at a 22-year high between 5.25 and 5.5% since July. Higher interest rates make it more expensive to buy a car, expand a business, or carry a balance on your credit card. The high rates are intended to tamp down demand and bring prices under control.

Annual inflation fell to 3.1% in November, thanks in part to a steep drop in gasoline prices, the Labor Department said Tuesday. Overall prices are climbing less than half as fast as they were at the beginning of the year.

Hopes grow for rate cuts next year

Inflation is still above the Federal Reserve's target of 2%, however. And members of the central bank's rate-setting committee stopped short of declaring prices under control.

"The Committee remains highly attentive to inflation risks," policymakers said in a statement.

Nonetheless, there's rising optimism that the Fed could start reducing interest rates starting next year.

Forecasts released Wednesday show on average, Fed policymakers think they'll be able to lower their benchmark rate by three-quarters of a percentage point by the end of next year, and another full point in 2025.

The economy has done better than expected

So far, the economy has weathered higher interest rates in far better shape than many forecasters expected.

The unemployment rate has been under 4% for 22 months in a row. The economy added more than two-and-a-half million jobs in the first 11 months of the year.

Fed policymakers expect somewhat slower growth and higher unemployment in 2024, but their outlook is generally more positive than it was (six/three) months ago.

"This is what a soft landing looks like, and this is what full employment feels like," said Joe Brusuelas, US chief economist for RSM. "That's why we're optimistic about the direction of the economy, heading into 2024."