For a third consecutive meeting, the US Federal Reserve’s policy committee held its benchmark interest rate at a 22-year high, but indicated its tightening cycle was likely done, with easing likely to begin in the new year.

After 11 increases since March 2022, the target range for the federal funds rate was maintained between 5.25 and 5.5 percent. In a slightly more dovish statement, officials acknowledged that “inflation has eased over the past year,” and softened language to suggest that incoming data would be monitored to determine whether “any” additional policy firming would be appropriate.

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is expected to end 2024 around 4.6 percent –  a level that implies three 25-basis point reductions next year, slightly below the four currently priced into swap curves – before falling to 3.6 percent in 2025. According to the previous iteration, rates were expected to hit 5.1 percent in 2024 and 3.4 in 2025 (note our caveats depicted in visual form below).

Under the updated forecasts, the core personal consumption expenditure price index is seen rising just 2.4 percent next year, down from 2.6 percent in September. Unemployment is expected to hit 4.1 percent by the end of 2024, unchanged from the previous projection. Growth expectations were revised slightly downward to 1.4 percent from the previous 1.5-percent estimate, but momentum is still seen accelerating toward 1.8 percent in 2025.

This comes after a slew of data releases in the last week pointed to a soft landing in the US economy: non-farm payrolls and wages kept growing in November, two closely-watched surveys showed household inflation expectations plunging, the consumer price index flatlined, and producer prices posted the smallest annual increase since January 2021.

Ten-year yields are coming down hard as we go to pixels, and the dollar is fading as traders double down on easing bets for the new year.

We expect Chair Powell to sound a more hawkish note when the post-meeting press conference begins in a few minutes, but he will also begrudgingly acknowledge policymakers have begun “thinking about thinking about” rate cuts – a sign market bulls are likely to take as a red flag for further risk-taking.