Markets expect the Fed to keep interest rates unchanged at its December 2023 meeting

If that happens, it will be the third consecutive time the Fed has “frozen” interest rates, a scenario that most investors believe is a near certainty. The hot issue now, debated by most markets and analysts, is when the US monetary policy authority will start cutting interest rates, for how long and how fast.

Gregory Daco, chief economist at EY, said it was almost certain that no further rate hikes would be forthcoming. However, there are still many unknowns about how the Fed will shape its policy outlook for next year.

In recent statements, Fed officials have continued to warn that interest rates will continue to rise until the dual goals of 2% inflation and unemployment are achieved. Fed Chairman Jerome Powell said it was too early to announce a pause in rate increases, nor was there enough basis to speculate on when monetary policy might be eased.

According to the report of the US Department of Labor on December 8, the number of non-farm jobs in November 2023 increased by 199,000, higher than the increase of 150,000 in the previous month. Low unemployment rate, stable job creation have brought positive signals of economic growth and decreasing inflation. In October 2023, the US consumer price index (CPI) was 3.2%, down from the peak of 9.1% during the pandemic.

The string of positive economic data has raised hopes that the Fed will soon achieve its goal of a “soft landing” — reducing inflation and avoiding a deep recession for the world’s largest economy. Traders in futures markets see a more than 98% chance that the Fed will leave interest rates unchanged at its meeting this week, according to data from the Fed Watch tool.

But the timing of a rate cut remains a contentious question mark. “The discussion around monetary policy normalization will become more active next year as progress on falling inflation continues,” economists at Deutsche Bank wrote in a recent market analysis report.

Deutsche Bank predicts 1.75 percentage points of Fed rate cuts in 2024 — much higher than its previous forecast of 0.5 percentage points.

Financial markets are leaning toward forecasting a Fed rate cut of about 1.25 percentage points next year, starting in March 2024. But EY chief economist Daco sees rates falling just 1 percentage point for the full year, starting in May 2024.

Among the few opinions that the Fed will continue to maintain its “hawkish” policy for a longer period of time, economists at Barclays bank said the Fed will keep interest rates unchanged until December 2024, before cutting interest rates.

In addition to the interest rate decision at the meeting in late 2023, the Fed is expected to release its Summary of Economic Projections (SEP), which includes forecasts for interest rates, inflation, gross domestic product (GDP), and unemployment. This will be important information that will provide analysts and traders with more insight into the outlook for Fed leaders' policy moves.