The Federal Reserve on Wednesday engineered a hawkish pause, holding interest rates steady while indicating a majority of officials expect one more quarter-point interest rate hike before the end of the year.
At the same time, the Fed sent a clear message that interest rates were expected to be “higher for longer” by cutting its forecast for rate cuts in 2024 from four to two. As a result, officials see their benchmark rate rate still slightly above 5% by the end of next year.
“The bottom-line is that the Fed is embracing the ‘higher for longer’ approach to getting inflation down to target,” said U.S. economist Thomas Simons at Jefferies.
After today’s decision, the Fed’s benchmark rate remains in a range of 5.25% to 5.5%. The vote to hold rates steady was unanimous.
According to the Fed’s dot-plot forecast, 12 Fed officials penciled in another 25 basis point rate hike this year, while seven projected no more more hikes.
Most economists expected the Fed would continue to pencil in one more hike this year.
“With growth still strong and still tentative evidence the labor market and inflation are normalizing, officials are unlikely to be willing to send a signal that they are done raising rates,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, prior to the decision.
That is well above current market pricing.
Will the Fed follow through with a rate hike this year?
Fed Chairman Jerome Powell said a hike will depend on the economic data. The Fed next meeting on Oct. 31- Nov. 1.
Officials think they are close to a level of rates that will gradually bring down inflation without a recession. Only one of the 19 Fed officials expects the Fed to need to raise rates above 6% next year.
In its latest statement, Fed officials upgraded their assessment of the economy, saying that activity was expanding at a “solid pace,” up from the description in July of “moderate” growth.
Officials also revised up their forecast for higher growth this year and next.
Core inflation was revised down this year but the expectation for a 2.6% rate in 2024 was kept. Inflation won’t return to the Fed’s 2% target until 2026.
Added altogether, the rosier economic forecast strongly suggested the Fed thinks it can achieve a rare “soft landing’ — taming inflation through higher interest rates without causing a recession.
“I do think it is possible,” Powell said in a press conference. “I always thought a ‘soft landing’ was a plausible outcome.”
Fed officials are divided on about the future path or rates. One camp wants to stand pat. The other thinks more hiking is likely needed.
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