Dow rises 400 points to record close after US central bank says three rate cuts are on the way

The Federal Reserve has held interest rates steady but policymakers have indicated they still expect to reduce them by three-quarters of a percentage point by the end of 2024 despite stodgier expected progress towards the US central bank’s 2 per cent inflation target.

The Fed’s new policy statement described inflation as remaining “elevated,” and updated quarterly economic projections showed the personal consumption expenditures price index excluding food and energy rising at a 2.6 per cent rate by the end of the year, compared to 2.4 per cent in the projections issued in December.

Still, 10 of the Fed’s 19 officials still expect the policy rate to fall at least three-quarters of a percentage point by the end of this year, a median view first set in December and maintained despite recent stronger than expected inflation.

The sentiment was slightly more hawkish though.

Eleven officials in December had seen three quarter-percentage-point cuts on tap for the year, and the new policy view came alongside an upgraded outlook for the economy.

Growth is expected at 2.1 per cent for the year compared to just 1.4 per cent projected in December, while the unemployment rate is predicted to end the year at 4 per cent, lower than the 4.1 per cent anticipated in December and barely changed from the 3.9 per cent jobless rate recorded in February.

One key measure, the longer-run policy rate, was moved higher by a tenth of a percentage point, from 2.5 per cent to 2.6 per cent, reflecting the views of some Fed officials that the economy can support higher interest rates overall in the future.

The Fed kicked off an aggressive monetary policy tightening cycle two years ago in response to a surge in inflation that would eventually hit a 40-year peak, but it has kept its policy rate in the 5.25 per cent-5.50 per cent range since last July.

The latest projections show the median policymaker expects the Fed’s benchmark overnight interest rate to fall three-quarters of a percentage point in 2025, less than the 1 percentage point projected in December as part of a slightly slowed rate cut path, and by three-quarters of a point in 2026 as well, the same as anticipated previously.

“Economic activity has been expanding at a solid pace. Job gains have remained strong and the unemployment rate has remained low,” the Fed said in its unanimously approved statement after the end of a two-day meeting.

The statement also repeated that officials are still seeking “greater confidence” in a continued decline of inflation before they begin cutting interest rates, language adopted at the Fed’s January 30-31 meeting that is likely to stay in place until just before the first rate reduction.