The Fed'€™s higher-for-longer strategy on interest rates is slowly crumbling. Welcome to higher-for-long-enough.

Investors are optimistic that the Federal Reserve will start reducing interest rates in the first half of next year, despite Chairman Jerome Powell and other officials stating that rate cuts are not currently being considered. Some believe that rate cuts may occur as early as the first quarter. Recent inflation figures have been positive, and real-time forecasts indicate a significant slowdown in economic growth as the year comes to a close. There is growing confidence that rate cuts are only a few months away, with a 44% chance of the first cut happening in March, according to futures. The Fed has previously kept rates steady before implementing cuts, similar to the period from the summer of 2006 when the benchmark lending rate remained unchanged for over a year. However, if the predictions of a rate cut in March or May prove true, it would contradict the Fed's strategy of maintaining higher interest rates for an extended period. The timing and pace of rate cuts by the Fed are expected to be gradual, and it is unlikely that interest rates will return to ultra-low levels. The Fed's two-day policy meeting this week is expected to conclude with rates being held steady at a 22-year high for the third consecutive meeting. The release of the central bank's latest economic projections will likely show inflation cooling faster than previously anticipated. The reasons for the Fed potentially cutting rates sooner than expected, despite officials claiming it's too early, are attributed to investors challenging the Fed's credibility and the central bank's data-driven approach. Powell's recent remarks suggesting that more rate hikes are still on the table were interpreted positively by the markets, but investors believe that the data does not support the need for further tightening. The announcement of China's proactive fiscal policy for 2024 aims to boost the country's struggling economy following Moody's recent downgrade of China's credit rating. Top Communist party officials emphasized the importance of expanding domestic demand, stabilizing foreign trade and investment, and managing risks in key areas. They pledged to strengthen fiscal policy moderately while improving its quality and efficiency. The use of taxation and government spending to influence the economy is referred to as fiscal policy, while monetary policy typically involves decisions made by central banks to control inflation and borrowing costs.