The U.S. Federal Reserve on Wednesday kept its benchmark interest rate on hold at a 22-year high of 5.25-5.50 percent for the third consecutive time, but officials suggested that reductions of borrowing costs may be coming next year amid signs of cooling inflation.

The Fed's quarterly economic projections, released after a two-day policy meeting, said the median forecast for the federal funds rate at the end of 2024 stands at 4.6 percent, signaling three quarter-point cuts from current levels.

The forecast was down from 5.1 percent predicted last time in September. The latest forecast for 2025 stands at 3.6 percent. The Fed's decision to extend a pause in rate increases since the last hike in July was announced as recent U.S. economic data have shown inflation is gradually easing.

U.S. Federal Reserve Chairman Jerome Powell speaks at a press conference in Washington on Dec. 13, 2023. (Kyodo)

The rate-setting Federal Open Market Committee said in a statement that "recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter," adding that "inflation has eased over the past year but remains elevated."

Financial markets quickly reacted to the likelihood of lower rates. New York stocks surged, with the Dow Jones Industrial Average ending at an all-time high, Treasury yields fell sharply and the U.S. dollar dropped against the Japanese yen and other currencies.

Still, Fed Chair Jerome Powell was careful in choosing his words at a press conference, repeating a number of times that future policy will be decided by the "totality" of incoming economic data.

"While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured," he said. "We are prepared to tighten policy further if appropriate."

This year's last FOMC decision came a day after the U.S. Labor Department said the consumer price index, a closely watched inflation gauge, rose 3.1 percent for November from a year earlier.

It compares with an annual inflation rate of 3.2 percent in October and 6.4 percent in January of this year, following a peak of 9.1 percent in June last year.

Since March 2022, the Fed has raised the target range for the federal funds rate from near zero in an attempt to tame high inflation without undermining the economy.

While Fed policymakers have said more needs to be done to meet the central bank's goal of bringing the inflation rate down to 2 percent, economists and investors have been searching for clues as to when it may cut rates next year.

Their focus has shifted to a looming rate reduction rather than whether the Fed will go for a 12th hike in its tightening cycle.

The decision not to change the benchmark rate, which commercial banks charge each other for overnight loans, means that the current pause will have been in place for half a year when the Fed holds its next monetary meeting in late January.

Powell did not offer any clear clues about when it may be appropriate to begin dialing back its fight against inflation, but an increasing number of market analysts are ramping up bets on a rate cut in the first six months of 2024.

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