The Federal Reserve kept interest rates steady in a decision issued on Wednesday, while also indicating that it still expects another hike before the end of the year and fewer cuts than previously indicated next year.
This final increase, if achieved, will meet this cycle, according to forecasts issued by the central bank at the end of its two-day meeting. If the Fed goes ahead with the move, it will make dozens of increases since it began tightening in March 2022.
Markets have priced in a complete inaction at this meeting, keeping the federal funds rate in a target range between 5.25%-5.5%, the highest level in about 22 years. The rate sets what banks charge each other for overnight lending, but also extends to many forms of consumer debt.
While no rate hike was expected, there was a great deal of uncertainty about the direction the Federal Open Market Committee, which sets interest rates, would take. Based on the documents released on Wednesday, there appears to be a bias towards a more restrictive policy and a higher, longer-term approach to interest rates.
Forecasts released in the Fed’s chart showed the possibility of one more increase this year, then two cuts in 2024, two fewer than indicated during the last update in June. This would put the funds rate around 5.1%. The plot allows members to anonymously indicate which direction they think prices are headed.
Twelve participants in the meeting agreed to the additional increase, while seven opposed it. This puts one party more in opposition than it was at the June meeting. It was confirmed that Fed Governor Adriana Kugler was not a voter at the latest meeting. Expectations for the federal funds rate for 2025 also rose, with the average forecast at 3.9%, compared to 3.4% previously.
Longer term, FOMC members again pointed to a funds rate of 2.9% in 2026. This is higher than what the Fed considers a “neutral” interest rate that is neither stimulating nor restrictive of growth. This was the first time the committee provided an outlook to 2026. The expected long-term neutral rate stood at 2.5%.
Along with rate forecasts, members also sharply revised their economic growth forecasts for this year, with GDP now expected to rise by 2.1% this year. This was more than double the June estimate and indicates that members do not expect a recession any time soon. GDP forecast for 2024 rose to 1.5% from 1.1%.
Expected inflation, as measured by the core personal consumption expenditures price index, also fell to 3.7%, down 0.2 percentage points from June, as did unemployment expectations, which are now expected at 3.8%, compared to 4.1% previously.
There were some changes in the post-meeting statement reflecting the adjustment in economic expectations.
The committee described economic activity as “expanding at a strong pace” compared to “moderate” in previous data. She also noted that job gains “have slowed in recent months but have remained strong.” This contrasts with previous language that described the employment picture as “strong.”
In addition to keeping interest rates at relatively high levels, the Fed continues to reduce its bond holdings, a process that has reduced the central bank’s balance sheet by about $815 billion since June 2022. The Fed is allowing up to $95 billion in proceeds When due. To subtract bonds each month, rather than reinvest them.
The Fed’s machinations come at a sensitive time for the US economy.
In recent public appearances, Fed officials have signaled a shift in their thinking, from a belief that they would be better off doing more to lower inflation to a new, more balanced view. This is partly due to perceived delayed effects from raising interest rates, which represents the Fed’s toughest monetary policy since the early 1980s.
There are growing signs that the central bank may be able to achieve its soft landing of lowering inflation without pushing the economy into a deep recession. However, the future is still far from certain, and Fed officials have expressed caution about declaring victory too early.
The jobs picture was strong, with unemployment at 3.8%, slightly higher than a year ago. Job openings have begun to decline, helping the Fed make progress in confronting a mismatch between supply and demand that at one point saw two jobs for every available worker.
Inflation data also improved, although the annual rate remains well above the Fed’s 2% target. The central bank’s preferred measure in July showed core inflation, which excludes volatile food and energy prices, at 4.2%.
Consumers, who account for about two-thirds of economic activity, have been resilient, spending even as savings dwindle and credit card debt surpasses the $1 trillion mark for the first time. In a recent survey by the University of Michigan, expectations for one-year and five-year inflation rates are at their lowest levels in several years.
However, public opinion polls reflect concern about the current state of the economy. In the latest CNBC All-America Poll, 69% of respondents expressed their dissatisfaction with the American economy, a record high in results dating back 17 years.
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Correction: The target federal funds rate is between 5.25 and 5.5%. An earlier version of this story misstated the endpoint of the range.