The Federal Reserve meets this week for the final time of the year, and it appears they won't leave a lump of coal in the stocking of investors and consumers this holiday season. "The Fed holds a two-day meeting that wraps up on Wednesday, and it is widely expected that they're going to leave their federal funds rate unchanged---which is currently standing at five-and-a-quarter to five-and-half percent," says KTRH Money Man Pat Shinn with Heritage Asset Advisors.
Indeed, the smart money believes interest rates have peaked, are now in a hold, and headed for a downturn in the year ahead. Shinn tells KTRH it's all about inflation, which is slowly easing but remains above historic levels, and above the Fed's target annual rate of two percent. "We don't think it's going to hit the Fed's target until late next year," he says. "But as inflation gradually eases, we expect the Federal Reserve will gradually bring those rates down, as well."
The Fed has made a notable shift in recent months, pausing rate hikes at its last two meetings after aggressively raising them since early 2022. Still, Fed Chair Jerome Powell has kept a lid on dovish expectations from Wall Street, warning that their focus continues to be curbing inflation with all tools on the table. Powell just said last week, "We are prepared to tighten policy further if it becomes appropriate to do so."
But the markets aren't buying Powell's tough talk. Stocks have been steadily rising over the past month, with more optimism for the year ahead. "The markets are pricing in that the Federal Reserve is done hiking rates," says Shinn. "And we think Chairman Powell will convey that on Wednesday."
As for when we can expect interest rates to finally start falling again, that could be sooner or later. "Right now, the markets have 50-50 odds of that first rate cut coming in March," says Shinn. "And then by this time next year, we expect the fed funds rate to be a full one to one-and-a-quarter percent lower."
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