brics-news — The Federal Reserve kept rates steady on Wednesday, but leaned far more hawkish than many had expected, forecasting two more hikes ahead as inflation continues to run above target.
The Federal Open Market Committee, the FOMC, kept its in a range of 5% to 5.25%.
It was the first time in more than a year that the Fed decided to keep rates steady, but the central bank signaled it wasn’t done with hikes, projecting two further hikes remain in the pipeline for the year.
The Fed increased its benchmark rate forecast to a terminal rate, or peak rate, of 5.6% at the midpoint in 2023, up from a prior forecast of 5.1% seen in March, suggesting two more hikes remain in play. Market participants were expecting the Fed to lift its outlook on rate hikes by about 0.25%.
Despite the outlook, Powell said the future rate decisions would be made on a meeting by meeting basis, adding that no decision had been made yet about the July meeting.
The steeper-than-expected path of rate hikes ahead comes as FOMC members expect , which remains well above the Fed’s 2% target, to pick up pace.
The price index, the Fed’s preferred measure of inflation, is forecast to be 3.9% in 2023, up from a prior forecast of 3.6%. For 2024, inflation is estimated to slow to 2.6%, unchanged from the prior forecasts. Fed members lifted their inflation forecasts for 2025 to 2.2% from 2.1% previously.
“I think if you look at the core PCE inflation overall, look at it over the last six months, you’re just not seeing a lot of progress,” Powell said in the press conference that followed the monetary policy statement.
The strength in the labor market, which has underpinned wages and plays a big role in services inflation, is also expected to continue.
The is expected to be 4.1% in 2023, down from a prior estimate of 4.6%, but rise to 4.5% next year, down 0.1% from the March forecast, according to the Fed’s projections. For 2025, the unemployment rate is expected to remain steady at 4.5%, slightly lower than the 4.6% estimate previously.
The improved outlook on the labor market was reflected in the FOMC’s outlook on the economy as growth, or GDP, estimates were hiked to 1% for 2023, up from 0.4% previously. In 2024, however, growth is expected to inch higher to 1.1%, up from a prior estimate of 1.1% and reaccelerated to 1.8% in 2025, down from a prior 1.8% forecast seen in March.
The Fed’s decision to stand pat on rates comes as FOMC members are eager to assess the impact of hikes delivered so far, and the degree of tightening in lending standards following the recent banking turmoil.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” according to the FOMC statement on Wednesday.
The Fed also flagged the impact of tighter credit conditions on economic activity, hiring, and inflation, but said the extent of “these effects remains uncertain.”