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Rate Cuts Begin to ‘Come into View’

After pausing interest-rate hikes for the third time, the Fed signaled three rate cuts are expected in 2024.

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Key Takeaways

  • For the third consecutive meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) held the federal funds target rate range at 5.25% to 5.50%.
  • Fed Chair Jerome Powell indicated that the current rate-hiking cycle is at or near its peak.
  • The FOMC’s latest “dot plot” projects three rate cuts in 2024, four in 2025 and three in 2026. If those cuts were 25 basis points each, that would bring the fed funds rate down to between 2.75% to 3%.
  • The Fed expects core inflation to fall steadily over the next three years until it reaches the central bank’s target of 2% in 2026.

At their December meeting, Federal Open Market Committee (FOMC) members unanimously agreed to leave the fed funds rate range unchanged at 5.25% to 5.50%, where it’s been paused since July.

With inflation easing and the economy still growing, the Fed’s decision to keep rates steady for the third consecutive time was broadly expected. But when the central bank will start easing monetary conditions is less clear.

“The question of when will it become appropriate to begin dialing back the amount of policy restraint in place—that begins to come into view and is clearly a topic of discussion out in the world and also of discussion for us at our meeting reading today,” said Fed Chair Jerome Powell at a post-meeting press conference.

The Fed’s latest “dot plot” projects three rate cuts in 2024, four in 2025 and three in 2026. If those 10 cuts were 25 basis points each, that would bring the fed funds rate down to between 2.75% to 3%.

The Federal Reserve also released its latest economic projections, which were rosier than the central bank’s September numbers. Real GDP growth estimates for this year rose from 2.1 to 2.6%, and core Personal Consumption Expenditures (PCE) price index—and Fed’s preferred inflation gauge—lowered from 3.7 to 3.2%.

However, Chair Powell cautioned that despite the economy’s resiliency in 2023, “it is far too early to declare victory” over inflation. Still, he sounded a note of optimism.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment—that’s very good news,” Chair Powell said.

The FOMC’s December statement made only a few changes from its November statement.

Source: FOMC as of 12/13/23.
Source: FOMC as of 12/13/23.

The committee’s September projections showed little change for 2024 across most of their projections, but one meaningful adjustment was to the committee’s projection to the median fed funds rate. This adjustment showed a material adjustment lower by 0.5% to 4.6%.

Market Reaction

After the Fed announcement, the 10-year Treasury ended the day lower at 4.04%; short- and long-term rates also retreated as the yield curve steepened on the long end. Equities closed higher on the final day. The Dow Jones Industrial Average finished up 1.40%, and the S&P 500 Index closed in similar fashion, up 1.37% with both indices spiking after the release of the Fed’s comments and projections.

Source: U.S. Department of the Treasury as of 12/13/23.
10-Year Treasury Yield over the Past 12 Months
Source: FRED as of 12/13/23. U.S. Department of the Treasury as of 12/13/23.


News from the FOMC meeting yielded almost no surprises: Interest rates held steady. The rate-hiking cycle is near or at its peak. Rate cuts are expected to begin next year. And inflation is trending toward the Fed’s 2% target. What set this meeting apart from previous ones during this rate-hiking cycle is the slight pivot to a more dovish tone. Chair Powell noted that the economy’s resilient, job growth is moving to more sustainable levels, and inflation is falling. The FOMC also penciled in one additional rate cut in 2024 than previously predicted.

Still, Chair Powell warned that the Fed’s decisions will continue to be data driven, even if that means continuing the rate-hiking cycle.

“While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table,” Chair Powell said.


One basis point is equal to 0.01%.

The 10-year Treasury note is a debt obligation issued by the U.S. government with a maturity of10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The Core Personal Consumption Expenditure (PCE) Price Index measures the changes in the price of goods and services purchased by consumers for the purpose of consumption, excluding food and energy.

A dot plot consists of data points plotted on a graph. The Federal Reserve uses dot plots to show its predicted interest rate outlook.

The Dow Jones Industrial Average Index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The federal funds rate is the interest rate that banks charge each other to borrow or lend excess reserves overnight.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that determines the direction of monetary policy.

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

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The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

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Foreside Financial Services, LLC, distributor.

Bloomberg Finance L.P. is unaffiliated with Aristotle Capital, Aristotle Funds, their affiliates, their distributors, and representatives

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