The Federal Reserve left its benchmark interest rate unchanged while signaling 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, 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% to 5.5%, 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% goal over time,” Powell said at a press conference following the decision.
He emphasized 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.
After raising rates rapidly last year, “now we’re fairly close, we think, to where we need to get,” Powell said.
Fed officials also see less easing next year, according to the new projections, reflecting renewed strength in the economy and labor market.
They now expect it will be appropriate to reduce the federal funds rate to 5.1% by the end of 2024, according to their median estimate, up from 4.6% when projections were last updated in June. They see the rate falling thereafter to 3.9% at the end of 2025, and 2.9% at the end of 2026.
Yields on two-year U.S. government bonds rose after the decision, while the dollar pared declines against major peers 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% 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% target. The Fed’s preferred index of prices, excluding food and energy, rose 4.2% in the 12 months through July.
Officials also continued to project inflation would fall below 3% next year, and see it returning to 2% in 2026. They expect economic growth to slow in 2024 to 1.5% after an upwardly revised 2.1% pace 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% in 2024, compared with 4.5% in the June projection round.
Powell said Wednesday 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% 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 Oct. 31-Nov. 1.
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