US Federal Reserve keeps key interest rate unchanged for third straight time

U.S. interest rate futures on Wednesday increased the chances of rate cuts by the Federal Reserve starting next March, with a 77%probability after the U.S. central bank’s new rate projections signaled the end of its tightening campaign.

Before the release of the U.S. central bank’s latest policy statement and economic projections, the probability of easing in March was around 40%. Rate futures also priced in more than 100 basis points in cuts next year, according to LSEG’s FedWatch.

The Fed on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, but said in its policy statement that inflation “has eased over the past year,” and noted that it would watch the economy to see if “any” additional rate hikes are needed.

A near-unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024 than it is now – with the median projection showing it falling three-quarters of a percentage point from the current 5.25%-5.50% range.

“The policy statement was relatively little changed from the last two renditions, but the subtle edits carry significant weight,” Tom Simons, U.S. economist at Jefferies in New York, said in a note.

“The addition of the word ‘any’ ahead of potential policy firming suggests less confidence that more firming will be needed. Given the recent progress in the data towards the dual-mandate goals, it seems like the writing is on the wall for this hiking cycle.”

In his press conference after the end of the latest two-day policy meeting, Fed Chair Jerome Powell confirmed what the “dot plot,” or the distribution of Fed officials’ rate projections, conveyed: that the U.S. central bank was likely done raising rates.

Over the last two weeks the rate futures market had mostly faded rate cuts in March after a string of fairly solid economic data, led by a still-robust U.S. jobs report for November.

In addition, the U.S. consumer price index last month remained elevated, with the headline CPI edging up 0.1% and the CPI excluding food and energy items rising 0.3%, in line with expectations. The year-on-year core CPI was 4.0%, still too hot for the Fed’s comfort.