WASHINGTON — The Federal Reserve on Wednesday ruled against an 11th straight interest rate hike as it gauges the fallout from the previous 10.
But the Federal Open Market Committee’s decision to delay the hike at the two-day meeting came Projections that another two quarters of a percentage point are on the way before the end of the year.
“We have raised our monetary interest rate by five percentage points and continued to reduce our holdings of securities at a rapid pace. We have covered a lot of ground and have yet to feel the full effects of our tightening,” he added. he said Fed Chairman Jerome Powell at the press conference after the central bank’s decision.
Possibility of further rate increases pressure on stocks immediately after the release of the report, but encouraging talk about the fight against inflation allowed the market to bounce back briefly.
“hawk pause”
Central bankers said it would take another six weeks to see the impact of policy moves as the Fed fights an inflation battle that has shown promising, if uneven, signs of late. The decision left the Fed’s key borrowing rate in a target range of 5-5.25%.
“Keeping the target range stable at this meeting allows the Committee to assess additional information and its implications for monetary policy,” it said in a post-meeting statement. The Fed next meets on July 25-26.
Markets had widely expected the Fed to “skip” the meeting — officials generally prefer the term “pause,” which implies a long-term plan to keep rates where they are. The expectation was strongly based on the increase after the politicians Powell and Vice President Philip Jefferson indicated that some change in approach might be in order.
The surprise aspect of the decision came with a “dot chart” in which individual FOMC members indicate their expectations for rates going forward.
The dots moved decisively higher, pushing the median expectation for the funds rate to 5.6% by the end of 2023. Assuming the committee moves in quarter-point increments, that would mean two more hikes over the remaining four meetings this year. Bank of America said in a post-meeting note that it expects the Fed to move in July and September.
During the press conference, Powell said the FOMC had not yet decided whether another hike was likely in July.
“People expected a hawkish pause and they got a very hawkish pause,” said David Russell, vice president of market intelligence at TradeStation. “Given the strong labor market, the Fed has room to suppress inflation and they don’t want to miss their chance.”
“Still, the cops skipped the tourist rates to track the data,” he continued. “This increases the importance of any incremental economic report. More good news like this week’s CPI and PPI could allow traders to look past the Fed’s tough talk and see a dovish turn later in the year. Jerome Powell is still a barking dog, but he can it’s losing its bite.”
Opinions on future hikes vary
FOMC members approved Wednesday’s move unanimously, although significant disagreements remained among members. Two members said they would see no increase this year, four saw one increase and nine, or half the committee, expected two. Two other members added a third hike, while one saw another four, again assuming quarter-point moves.
Members also raised their forecasts for the years ahead and now expect the Fed funds rate to be 4.6% in 2024 and 3.4% in 2025. That’s up from the respective forecasts of 4.3% and 3.1% in March, when summary of economic projections last updated. .
But next year’s data suggests the Fed will start cutting rates — by a full percentage point in 2024, if this year’s outlook holds. The long-term expectation for the Fed Funds rate was held at 2.5%.
These changes to the rate outlook come as members raised their economic growth expectations for 2023 and now expect GDP to rise 1%, compared to the 0.4% estimate in March. Officials have also been more optimistic this year about unemployment, which now sees the rate at 4.1% by the end of the year, compared with 4.5% in the March forecast.
On inflation, they raised their collective projection to 3.9% for core (excluding food and energy) and cut it slightly to 3.2% for headline. Those figures were 3.6% and 3.3% for the personal consumption expenditure price index, the central bank’s preferred gauge of inflation. The outlook for the coming years in GDP, unemployment and inflation has changed little.
Fed officials believe that policy actions operate with “long and variable lags,” meaning that it takes time for rate hikes to feed through the economy.
The Fed began raising rates in March 2022, about a year after inflation began to rise dramatically to its highest level in 41 years. Those rate hikes took the Fed’s benchmark 5 percentage points to a level not seen since 2007.
The increase helped push 30-year mortgage rates above 7% and also raised the cost of borrowing on other consumer items such as auto loans and credit cards.
Recent data, such as the consumer and producer price indexes, have shown that the rate of inflation is slowing, although consumers still face high costs for many items. The FOMC statement he went on to note that “inflation remains elevated”.
Inflation has hit the US economy due to many factors related to the Covid pandemic – clogged supply chains, unusually strong demand for expensive goods over services, and trillions in stimulus from both Congress and the Fed, which had plenty of money to chase goods shortages. .
At the same time, a mismatch between labor market supply and demand pushed both wages and prices higher, a situation the Fed sought to remedy with policy tightening that included both rate hikes and more than half a trillion dollars in cuts. assets it holds on its balance sheet.
—CNBC’s Sarah Min contributed to this report.