Keeping rates steady will allow the Fed to assess information as it seeks to balance economic risks with high inflation.
The U.S. central bank left interest rates unchanged on Wednesday but signaled in new economic forecasts that the rate of decline in inflation slowed as the central bank responded to a stronger-than-expected economy and inflation.
To balance the risks facing the economy with the unresolved battle to control inflation, “keeping the target (interest rate) range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the rate-setting Federal Open Market Committee Delivered a consistent policy statement at the end of the most recent two-day meeting.
Further rate hikes would “take into account the cumulative tightening of monetary policy, the lag with which monetary policy affects economic activity and inflation, and economic and financial developments,” it said.
The new forecasts added to the hawkish tilt at Wednesday’s rate decision, showing the median policymaker sees the benchmark overnight rate rising to a range of 5.5% to 5.75% by the end of the year from the current range of 5% to 5.25%. Half of the 18 Fed officials wrote that level on their “points,” with three seeing the policy rate even higher — including one who thought it would rise above 6%.
Two Fed officials thought rates would stay on hold and four said another 25 percentage point increase might be appropriate.
However, policymakers expect 100 basis points of rate cuts in 2024, accompanied by a rapid decline in inflation.
Taken together, the rate outlook and forecasts could lead investors to expect a return to 25 percentage point hikes starting at the next policy meeting in July.
improve economic perspective
The prospect of higher interest rates coincides with an improving view of the economy and, as a result, the progress of inflation back to the central bank’s 2% target has slowed.
Fed officials more than doubled their 2023 economic growth forecast from 0.4% forecast in March, and now expect the unemployment rate to rise to just 4.1% by year-end, compared with the 4.5% forecast in March.
The unemployment rate as of May was 3.7%.
The stronger-than-expected economy means inflation will fall more slowly, with the core personal consumption expenditures price index falling to 3.9 percent by year-end from 4.7 percent now, compared with the 3.6 percent year-end growth forecast by policymakers in March.
The decision ended a streak of 10 rate hikes as the Fed responded to the worst burst of inflation in 40 years with a series of aggressive policy moves, including four extra hikes by three-quarters of a percentage point last year.
The central bank’s policy rate, which affects borrowing costs for households and businesses across the economy, has risen by a full 5 percentage points since the tightening cycle began in March 2022, reaching its highest level before the start of the 2007-2009 recession.