The Federal Reserve held interest rates steady on Wednesday, but officials indicated that they are ready to raise interest rates again this year to tame stubborn inflation.
The central bank maintained its benchmark interest rate in the range of 5%-5.25%, marking the first time since January 2022 that the Fed did not change interest rates after a policy meeting.
However, Fed officials have raised their interest rate forecasts for this year, suggesting that rates could rise to 5.6%, which means two more rate hikes are likely this year. Three officials see rising rates approaching 6%.
“Inflationary pressures continue to mount,” Federal Reserve Chairman Jerome Powell said at a press conference on Wednesday. Getting inflation to the Fed’s target level “has a long way to go.”
Next year, officials expect interest rates to drop 100 basis points to around 4.6%, above the March forecast of 4.3%.
Powell said the halt announced on Wednesday should not be called a “skip.” What it does, he added, is give the economy more time to adjust to previous increases while allowing Fed officials to see the “full consequences” of the banking turmoil that roiled the financial system in the spring.
“We’re trying to rectify that,” Powell said.
Stocks closed mixed on Wednesday. The S&P 500 (^GSPC) was nearly flat, while the Dow Jones Industrial Average (^DJI) was down 0.68%, or more than 200 points. The high-tech Nasdaq Composite Index (^IXIC) rose from its lows, gaining 0.39%.
Several regional banks that have struggled in the wake of the failures of several large lenders fell again on Wednesday. PacWest (PACW) ended the day down 6.5%, Western Alliance (WAL) was down 5.8%, and Zions (ZION) was down 5.7%. Banks are very sensitive to an increase in interest rates.
The Fed raised rates in 10 consecutive policy meetings through May, bringing its target range from 0%-0.25% to 5%-5.25%, the highest level since 2007, in just 14 months. Wednesday’s decision to keep interest rates steady was unanimous.
Since peaking at 9.1% in June 2022, inflation has fallen, with headline inflation rising just 4.1% in May according to data released on Tuesday. On a “core” basis – which excludes volatile food and energy prices – inflation came in at 5.3% for the month of May. Compared to 5.5% in April.
Both readings are still well above the Fed’s 2% target.
updated Economic forecasts were released WednesdayIt’s allowed the Fed to have both ways — pause rate hikes and also be more aggressive in signaling future actions, said Neil Dutta, a Renaissance macroeconomist.
“This is what the Fed should have done,” Dutta wrote in an email.
In its statement, the Fed left itself room to raise interest rates again this year, retaining wording that, “In determining the extent to which additional policy accommodation may be appropriate…the Committee will take into account the cumulative tightening of monetary policy, and the slowdowns affecting it.” Monetary policy on economic activity, inflation, and economic and financial developments.
Powell said at a news conference that the topic of what to do in July “boke up” at the central bank’s Federal Open Market Committee meeting on Wednesday but that the Fed has not made a decision on what to do next month.
Powell also brought back language former Fed Chair Janet Yellen famously used before the Fed’s rate-raising cycle that began in 2015 — the “live” meetings.
Asked directly about the July meeting, Powell said, “First, (a) the decision has not been made. Second, I expect the meeting to be live.”
Powell also emphasized that inflation is not declining as quickly as the central bank had hoped.
“We want to see it go down decisively,” he said. “That’s it. Of course, we will bring inflation down to 2% over time. We want to do it as little damage as possible to the economy, of course. But we have to bring inflation down to 2%, and we will.”
Alongside its policy decision on Wednesday, the Fed released an updated Summary Economic Projections (SEP), which outlined officials’ projections for growth, inflation, rates and the labor market over the course of this year and the next two years.
Fed officials expect general inflation to end near 4% now, compared to 3.6% previously. The unemployment rate is expected to rise to 4.1% from 4.5% previously. Officials now see stronger economic growth this year, at 1% versus 0.4% previously.
Officials noted again that tightening credit conditions for households and businesses is likely to affect the economy, employment and inflation, and the degree of impact is uncertain.
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