Federal Reserve holds interest rates steady as inflation cools

The Federal Reserve again kept interest rates steady in final meeting of the year on Wednesday.

The U.S. central bank left its benchmark rate at of 5.25% to 5.50%, where it has been since late July. That marked the third consecutive meeting in which the Fed has left rates unchanged after it raised them at a historically rapid pace beginning in March 2022.

Annual inflation was at about 8% when the Fed started raising rates last year. In June it peaked at 9.1%. As of November, inflation was down to a more manageable level of 3.1%.

“Inflation has eased over the past year but remains elevated," the Fed said in a statement. "Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation."

Experts and investors are growing convinced that the Fed is probably done raising interest rates for the foreseeable future. They're now turning their attention to when the Fed might start reducing rates.

"We think that the hiking cycle is done, though the committee will reserve the right to hike if necessary," a group of Bank of America economists wrote in a research note published on Friday.

Based on futures market data, CME Group's FedWatch Tool says the odds are above 90% that the Fed will also leaves rates unchanged at its next meeting in late January.

After that, futures market data shows that market participants think there's a strong chance the Fed will start cutting rates and almost no chance it will raise them further.

Documents the Fed released on Wednesday show that on average, its policy decision makers expect to cut interest rates by about 75 basis points next year. That's what investors were already anticipating.

“This is a significant change from September when the Fed expected one more hike, and then just two rate cuts from that elevated level in 2024,” wrote Greg McBride, chief financial analyst for Bankrate. “Collectively, the Fed expects rates to be one-half percentage point lower at the end of next year than was the case just 3 months ago.”

That's led to a decline in long-term Treasury bond yields and in interest rates on mortgages and other loans. The yield on the 10-year Treasury note peaked at nearly 5% in mid-October, and it's now down to about 4.09%.

According to the government-backed lender Freddie Mac, the interest rate on a 30-year fixed rate mortgage is down to about 7% as of Wednesday, after reaching 23-year highs of 8% in early October. That's prompted more people to put their homes on the market, and it's welcome news for buyers because it means the numbers of available homes are rising as borrowing gets slightly easier.

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