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 its two-day meeting while projecting two more quarterly hikes before the end of the year.
“We have raised our policy rate by five percentage points and continued to rapidly reduce our holdings of securities. We have covered a lot of ground and the full impact of our tightening policy has yet to appear. The prospect of further rate hikes weighed on stocks Immediately after the news, but encouraging comments about fighting inflation led to a short-lived market rally. Central bankers said they would take another six weeks to see the impact of policy moves as the Fed grapples with an inflationary struggle that has shown some promising but mixed signs of late. 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 Fed's next meeting is on July 25-26. The Fed is widely expected to "skip " the meeting -- a term officials typically prefer to "pause," implying a long-term plan to keep rates on hold. Expectations were heavily skewed towards a rate hike after policymakers, notably Powell and Vice Chairman Philip Jefferson, suggested some changes in approach might be needed.
The surprising aspect of the decision comes from the "dot plot", in which individual members of the FOMC indicate their expectations for further interest rates. These points moved markedly upward, pushing the median forecast for the funds rate to 5.6% by the end of 2023. Assuming the committee moves in quarter increments, that would mean two more rate hikes over the remaining four meetings of the year. Bank of America said in a note after the meeting that it expected the Fed to act in July and September. At the news conference, Powell said the FOMC has yet to make a decision on whether another rate hike is 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 curb inflation and they don’t want to miss out .”
"Still, policymakers are holding off on raising rates so they can monitor the data," he continued. "This increases the importance of every incremental economic report. More good news this week such as CPI and PPI may cause traders to ignore the Fed's hawkish rhetoric and see a dovish turn later in the year." Jero M Powell is still a barking dog, but he may be losing his bite." 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, data for the year ahead does suggest 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%. The changes to the outlook for interest rates came as members raised their forecasts for economic growth in 2023, 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 this year, which is now expected to end the year at 4.1%, compared with a forecast of 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%. For the personal consumption expenditures price index, the central bank's preferred inflation gauge, the figures were 3.6 percent and 3.3 percent, 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 came within 5 percentage points of the Fed's benchmark, the most since 2007.
The rate hike 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 continued, "Inflation remains elevated." Inflation has hit the U.S. economy due to a number of factors related to the Covid 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, which have The measure has plenty of money chasing commodity shortages.
At the same time, supply-demand imbalances in the labor market have pushed up wages and prices, and the Federal Reserve has attempted to correct this by tightening policy, including raising and raising interest rates by more than $500 billion. Assets it holds on its balance sheet.
