Fed Leaves Rates Unchanged
The majority of FOMC members expect to enact another rate hike before the end of this year.
The Federal Reserve left its benchmark interest rate unchanged today, while signaling that borrowing costs will likely stay higher for longer after one more hike this year.
The U.S. central bank’s policy-setting Federal Open Market Committee (FOMC), in a post-meeting statement published Wednesday in Washington, repeated language saying officials will determine the “extent of additional policy firming that may be appropriate.”
Fed Chair Jerome Powell said officials are “prepared to raise rates further, if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”
The FOMC held its target range for the federal funds rate at 5.25 percent to 5.5 percent, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.
“We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to our 2 percent goal over time,” Powell said at a press conference following the decision.
He emphasized that the Fed will “proceed carefully” as it assesses incoming data and the evolving outlook and risks, echoing remarks he made at the Fed’s annual symposium in Jackson Hole, Wyoming, last month.
“We’re fairly close, we think, to where we need to get,” Powell said.
Fed officials also see less easing next year than they expected in June, according to the new projections, reflecting renewed strength in the economy and labor market.
They now expect that it will be appropriate to reduce the federal funds rate to 5.1 percent by the end of 2024, according to their median estimate, up from 4.6 percent when projections were last updated in June. They see the rate falling thereafter to 3.9 percent at the end of 2025 and 2.9 percent at the end of 2026.
Treasuries sold off after the decision, with the yields on two-, five-, and 10-year U.S. government bonds all rising to the highest in more than a decade. The dollar also reversed earlier declines, ending the day higher, and the S&P 500 index of stocks erased earlier gains.
After a historically rapid tightening that took the federal funds rate from nearly zero in March 2022 to above 5 percent in May of this year, the central bank has in recent months pivoted to a slower pace of increases.
The new tack seeks to let incoming data determine the peak level for interest rates as inflation decelerates toward the 2 percent target. The Fed’s preferred index of prices, excluding food and energy, rose 4.2 percent in the 12 months through July.
Officials also continued to project that inflation would fall below 3 percent next year, and they see it returning to 2 percent in 2026. They expect economic growth to slow in 2024 to 1.5 percent after an upwardly revised pace of 2.1 percent in 2023.
The higher-for-longer projection for interest rates in part reflects a more sanguine view on the path for unemployment. Policymakers now see the jobless rate rising to 4.1 percent in 2024, compared with 4.5 percent in the June projection round.
Powell said Wednesday that a “soft landing” is not the Fed’s baseline expectation for the U.S. economy, but it is the primary objective as it seeks to contain inflation.
Resilient Economy
Data published since the Fed’s last meeting at the end of July have generally shown the labor market and consumer spending remain resilient despite the rise in rates, while core inflation has continued to decelerate.
Still, there are plenty of headwinds policymakers must consider. Oil prices have surged by about 30 percent since June, while a resumption of student-loan payments next month will take more discretionary spending power out of consumers’ hands.
A possible government shutdown at the end of this month is also looming over the outlook and threatens to deprive policymakers of key data on employment and prices produced by federal agencies heading into the next Fed meeting, October 31 to November 1.
—With assistance from Kristy Scheuble, Vince Golle, Sophie Caronello, Cécile Daurat, Ana Monteiro & Ye Xie.
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