What to see at the Fed’s last meeting in 2023

Federal Reserve officials will conclude a year of aggressive inflation fighting Wednesday afternoon, after which they are expected to use their final policy decision in 2023 to leave interest rates at a 22-year high.

The Fed is ending the year on a break after its most intense campaign of rate hikes in decades, aimed at eradicating the rapid price increases that have rattled consumers since 2021.

With inflation now down substantially, central bankers have increasingly indicated they may be done raising borrowing costs, which are set at a range of 5.25 to 5.5 percent. The question investors will focus on Wednesday is how much interest rates are expected to fall in 2024 – and when those cuts could start.

The Fed will release its statement and a new set of quarterly economic forecasts at 2 p.m., followed by a press conference with Fed Chairman Jerome H. Powell at 2:30 p.m. Here’s what you can watch.

How many cuts are expected?

Investors will closely analyze the Fed’s new economic projections, the first since September. Three months ago, officials expected to raise rates again in 2023 – something now seen as unlikely – before cutting them twice in 2024.

That begs the question: where will policymakers see interest rates at the end of next year? If they keep their projection steady at 5.1 percent, that would imply only one rate cut now. A drop to 4.9 percent would mean that two interest rate cuts are expected.

The economic estimates will also provide a hint at the reasoning behind the interest rate projections: They will show where officials expect inflation, the unemployment rate and growth to be at the end of the next few years and over the longer term.

How soon can lower rates come?

One thing the projections don’t provide is an idea of ​​when rate cuts might begin. The economic projections provide estimates for the end of the year only. For hints about the timing, Wall Street will have to rely on what Mr. Powell signals during his press conference.

Mr. Powell has so far been reluctant to speculate on when borrowing costs might fall, or even to definitively signal that the Fed is done raising interest rates.

“It would be premature to conclude with confidence that we have reached a sufficiently restrictive position, or to speculate about when policy might ease,” Mr. Powell said at a recent speech.

Christopher Waller, a Fed governor, said during a recent speech that if Fed officials were to see disinflation continue for several more months – I don’t know how long that might last, three months, four months, five months – we are confident could mean that inflation has really come down,” fueling some speculation that the central bank could even start cutting rates early next year.

But Richard Clarida, who served as Fed vice chair until early 2022, said he thought a first step down in May or June would be “more natural” if the committee expected two cuts next year.

“Given what we know now, March seems pretty early to me,” he said.

Will this require economic pain?

Mr. Powell’s comments will also attract attention for another reason: He could provide further hints about what kind of economic conditions the Fed thinks will be needed to reduce inflation.

So far, price increases have moderated substantially without much pain. Hiring has slowed, but unemployment remains below 4 percent – ​​an all-time low. Consumers have continued to spend, corporate profits are strong and even the interest-rate sensitive housing market is seeing continued activity.

A major reason that price increases have slowed despite that continued momentum is that the price of goods has started to fall again. That’s partly because demand has declined, but it’s also due in large part to the recovery of global supply chains that have brought products to market.

As workers return to the labor market and fill open positions, wage increases are also cooling – which could indicate that labor-intensive service sectors will stop raising prices.

But there are questions about whether that supply-led moderation in prices will be enough to lower inflation the rest of the way.

A consumer price index report this week showed that the closely watched core inflation measure, which excludes volatile fuels and food, remained at 4 percent in November. That’s down from a peak of 6.6 percent, but the process of slowing that measure has been a bumpy one.

The question, which Mr. Powell could provide insight into, is whether the Fed can wring the rest of the rapid inflation out of the economy without an apparent economic slowdown, causing what economists often call a “soft landing.”

“The data is very encouraging,” said Karen Dynan, an economist at Harvard University. “But I don’t think we’re out of the woods yet.”