What to expect from the US Federal Reserve's January meeting

This shift in expectations is set against the backdrop of a robust US economy, which in 2023, showed strong growth, defying recession fears. The economy benefited from low unemployment and cooling inflation, with the fourth quarter's annual growth rate at 3.3%. Despite initial concerns over the Fed’s rate hikes, the economy grew by 2.5% over the year, an improvement from the previous year’s 1.9%. The inflation rate also moderated to 3.4% in December.

The Fed’s last meeting in December suggested a possibility of three quarter-point rate cuts this year, albeit fewer than what financial markets and some economists had expected. This led to significant gains in stocks and bonds, with the S&P 500 increasing nearly 22% over the past year. However, debate over rate cut timing and speed is growing. Recent official comments also indicate that immediate policy changes are unlikely.

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A reduction in the Fed rates would lead to lower borrowing costs across the economy. This includes a decrease in interest rates for various types of loans such as mortgages, credit cards, auto loans, and business loans, as these are generally linked to the fed funds rate.