WASHINGTON – The Federal Reserve decided on Wednesday not to raise interest rates for the 11th time in a row as it weighed the impact of the previous 10 hikes.
But the FOMC decided to hold off on raising rates at this meeting, while projecting two more quarters of hikes before the end of the year.
After a two-day meeting, central bankers said they were still six weeks away from seeing the impact of policy moves as the Fed grapples with an inflation battle that has shown some promising but uneven signs of late signs. The decision kept the Fed’s key lending rate within a target range of 5% to 5.25%.
“Leaving the target range unchanged at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the statement after the meeting said. The next Fed meeting will be held on July 25-26.
The Fed is widely expected to “skip” the meeting – a term officials generally prefer to “pause”, which implies a long-term plan to keep interest rates at current levels. Expectations were heavily skewed towards a rate hike after policymakers, notably Chairman Jerome Powell and Vice Chairman Philip Jefferson, suggested some changes in approach may be needed.
The surprising aspect of the decision is the “dot plot,” in which individual FOMC members indicate their expectations for future rates.
These points have shifted markedly upwards, pushing the median funds rate forecast to 5.6% by the end of 2023. Assuming the committee moves in 25 basis point increments, that would mean two more hikes in the remaining four meetings this year.
FOMC members unanimously approved Wednesday’s move, but members remain fairly divided. Two members said they did not expect any rate hikes this year, four expected one rate hike and nine members, or half of the committee, expected two hikes. Two more members added a third rate hike, while one added four more, again assuming a quarter increase.
Members also raised their forecasts for the coming years, now seeing the federal funds rate at 4.6 percent in 2024 and 3.4 percent in 2025. That was higher than the 4.3 percent and 3.1 percent forecast, respectively, in the March summary of economic forecasts when it was last updated.
However, the data for the year ahead do imply that the Fed will start cutting rates — a full percentage point in 2024 if this year’s outlook holds. The long-run forecast for the federal funds rate remains at 2.5%.
These changes to the outlook for interest rates come as members raised expectations for economic growth, with GDP now expected to expand by 1%, compared with a forecast of 0.4% in March. Officials are also more optimistic about the unemployment rate, which is now expected to end the year at 4.1%, compared with 4.5% in March.
On inflation, they raised their headline forecast for the core (excluding food and energy) to 3.9% and lowered their headline forecast slightly to 3.2%. The personal consumption expenditures price index, the central bank’s preferred measure of inflation, came in at 3.6% and 3.3%, respectively. The outlook for GDP, unemployment and inflation in subsequent years was little changed.
Fed officials argued that policy moves have a “long and variable lag,” meaning that rate hikes take time to work through the economy.
The Fed began raising rates in March 2022, about a year after inflation began to climb sharply to its highest level in about 41 years. Those rate hikes have hit 5 percentage points of the Fed’s benchmark, the most since 2007.
The rate hikes helped push 30-year mortgage rates above 7 percent and boosted borrowing costs for other consumer items such as auto loans and credit cards.
Recent data, such as consumer and producer price indices, have shown a slowdown in inflation, but consumers still face high costs for many goods. The FOMC statement went on to note that “inflation remains elevated.”
Inflation has battered the U.S. economy due to a combination of factors related to the pandemic — clogged supply chains, unusually strong demand for high-priced goods rather than services, and trillions of dollars in stimulus from Congress and the Federal Reserve, but ample cash. lead to commodity shortages.
At the same time, supply-demand imbalances in the labor market have pushed up wages and prices, a situation the Fed has attempted to correct by tightening policy, including raising interest rates and shrinking the more than $500 billion in assets it kept on its balance sheet.