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Fed 'dot plot' shows central bank will cut interest rates by 0.75% in 2024

The Federal Reserve kept interest rates unchanged in a range of 5.25%-5.5% at its final meeting of the year on Wednesday. Central bank officials also predicted rate cuts to come, with interest rates expected to tick down to 4.6% next year.

Along with its policy announcement, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future.

Fed officials see the fed funds rate peaking at 4.6% in 2024, down from the Fed's previous September projection of 5.1%. That suggests the Fed will cut rates by 0.75% next year.

The Fed has moved in 25-basis-point increments over the last year, indicating the central bank now expects to cut interest rates three times in 2024.

Immediately following the SEP's release, markets were pricing in a nearly 60% chance the Federal Reserve will begin to cut rates at its March meeting, up from 40% the day prior, according to data from the CME Group.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

Seventeen officials predict a rate cut next year, with five officials seeing a decrease of more than 0.75% while just two see no cut. No officials see rates ticking higher in 2024. This month's expectations for rates next year were also less widely distributed compared to September's projections.

The forecast was also revised lower for 2023 to match the Fed's hold. As recently as September, officials had forecast one more rate hike this year. At the end of 2022, officials had projected interest rates would peak at 5.1% in 2023.

The SEP indicated the Federal Reserve sees core inflation peaking at 2.4% next year — lower than September's projection of 2.6% — before cooling to 2.2% in 2025 and 2.0% in 2026.

Officials see unemployment rising to 4.1% in 2024, matching the previous forecast. Unemployment is expected to remain at that level through 2026.

The Fed also sees a deceleration in economic growth, with the economy forecast to grow 1.4% next year — down from September's 1.5% projection — before picking up slightly to 1.8% in 2025 and 1.9% in 2026.

Stocks jumped materially on the heels of the decision as the 10-year Treasury yield (^TNX) dropped about 11 basis points to trade near 4.1%.

FILE - Federal Reserve Chairman Jerome Powell is introduced at the Jacques Polak Research Conference at the International Monetary Fund, Thursday, Nov. 9, 2023, in Washington. The Fed is set to leave interest rates unchanged while facing speculation about eventual rate cuts. (AP Photo/Mark Schiefelbein, File)
Federal Reserve Chair Jerome Powell is introduced at the Jacques Polak Research Conference at the International Monetary Fund, Nov. 9 in Washington, D.C. (Mark Schiefelbein/AP Photo, File) (ASSOCIATED PRESS)

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com

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