What to Watch at the Fed’s Final Meeting of 2023

Federal Reserve officials will wrap up a year of aggressive inflation fighting on Wednesday afternoon, when they are expected to use their final policy decision of 2023 to leave interest rates at their highest level in 22 years.

The Fed is finishing the year on pause after the most intense campaign of interest rate increases in decades, one meant to snuff out the rapid price gains that have been bedeviling consumers since 2021.

Because inflation has now moderated substantially, central bankers have increasingly signaled that they may be done raising borrowing costs, which are set to a range of 5.25 to 5.5 percent. The question investors will be focused on Wednesday is how much rates are expected to come down in 2024 — and when those cuts might begin.

The Fed will release its statement and a fresh set of quarterly economic projections at 2 p.m., followed by a news conference with Jerome H. Powell, the Fed chair, at 2:30 p.m. Here’s what to watch.

How many cuts are projected?

Investors will closely parse the Fed’s fresh economic projections, the first they have released since September. Three months ago, officials expected to lift interest rates one more time in 2023 — something that is now seen as unlikely — before lowering them twice in 2024.

That opens up the question: Where will policymakers see interest rates at the end of next year? If they hold their projection steady at 5.1 percent, that would now imply only one rate cut. A drop to 4.9 percent would imply two rate cuts are anticipated.

The economic estimates will also give a hint at the reasoning behind the rate projections: They will show where officials expect inflation, the unemployment rate and growth to be at the end of the next several years and over the longer run.

How soon might lower rates come?

One thing the projections will not offer is a sense of when rate cuts might commence. The economic projections give only end-of-year estimates. For hints at timing, Wall Street will have to rely on whatever Mr. Powell signals during his news conference.

Mr. Powell has so far been hesitant to speculate about when borrowing costs might come down, or to even signal definitively that the Fed is done raising interest rates.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Mr. Powell said during a recent speech.

Christopher Waller, a Fed governor, said during a recent speech that if Fed officials saw disinflation continuing “for several more months — I don’t know how long that might be, three months, four months, five months — we might feel confident that inflation is really down,” fueling some speculation that the central bank could start to cut interest rates even early next year.

But Richard Clarida, who was Fed vice chair until early 2022, said that he thought that an initial move down in May or June would be more “natural” if the committee was projecting two cuts next year.

“Given what we know now, March seems pretty early to me,” he said.

Will it require economic pain?

Mr. Powell’s comments will also be in focus for another reason: He could give further hints about what kind of economic conditions the Fed thinks will be necessary to bring inflation down.

So far, price increases have moderated substantially without much pain. Hiring has slowed, but unemployment remains below 4 percent — a historically low level. Consumers have continued spending, corporate profits are strong, and even the rate-sensitive housing market has seen continued activity.

A big reason that price increases have moderated despite that continued momentum is that the price of goods has begun to edge down again. That has come partly because demand has eased off, but it also owes a lot to healing global supply chains that have brought products to market.

As workers return to the labor market, filling open jobs, wage gains have also been cooling — which could suggest that labor-heavy services industries will stop raising prices as quickly.

But there are questions about whether that supply-driven moderation in pricing will be enough to lower inflation the rest of the way.

A Consumer Price Index report this week showed that the closely watched core inflation measure, which strips out volatile fuel and food, lingered at 4 percent in November. That is down from a peak of 6.6 percent, but the process of slowing that measure down has been a bumpy one.

The question, which Mr. Powell could give insight into, is whether the Fed can wring the rest of the quick inflation out of the economy without a marked economic slowdown, pulling off what economists often refer to as a “soft landing.”

“The data have been very encouraging,” said Karen Dynan, an economist at Harvard University. “But I don’t think we’re out of the woods yet.”