The Federal Reserve said Wednesday it will pause its rate hikes, keeping its benchmark lending rate at a 22-year high, while signaling fewer rate cuts next year.
The move was widely expected, after the central bank signaled in recent weeks that it intended to wait for more data to understand how previous rate hikes are affecting the US economy.
Since March 2022, the Fed has lifted interest rates 11 times and held them steady twice, including September’s pause.
The Fed’s latest set of economic projections showed that more officials expect the Fed’s key lending rate to top out at a range of 5.63-5.87% this year, meaning there could likely be another rate hike by year’s end. Officials revised their expectation of economic growth this year much higher and their projection of the unemployment rate slightly lower.
Notably, officials expect fewer rate cuts in 2024 than previously estimated, confirming investors’ fears that interest rates could remain higher for longer.
“The new projections suggest that the Fed has a fairly strong degree of confidence in its outlook for a soft landing and, in turn, that there will be very minimal space for policy easing next year,” wrote Seema Shah, chief global strategist at Principal Asset Management, in an analyst note.
“The dot plot for next year has certainly rammed home the message of ‘higher for longer’ and reflects the continued wariness and fear of an inflation resurgence if it takes the foot off the brake too soon and too quickly,” she said.
The central bank’s latest post-meeting statement Wednesday said “economic activity has been expanding at a solid pace,” compared with a “moderate pace” noted in the previous statement.
The statement also noted that job gains have “slowed in recent months,” compared with job growth being described as “robust” in the Fed’s July policy statement.
Fed officials again emphasized that the central bank is “strongly committed to returning inflation to its 2% objective.” Officials deliberate monetary policy again at their two-day meeting next month, which concludes on November 1.
US stocks closed lower on Wednesday, with the Dow 0.2% lower, the S&P 500 losing 0.9%, and the Nasdaq Composite down 1.5%.
‘A soft landing is a primary objective’
Inflation has slowed steadily from its four-decade peak last June, and it could ease all the way to the Fed’s 2% target without a sharp uptick in unemployment — a scenario known as a “soft landing.” Or, inflation could eventually drift down to 2%, but with the economy slipping into a recession as unemployment rises.
Some Fed officials are optimistic they can pull off a soft landing, but the central bank has to contend with a number of uncertainties and economic headwinds in the coming months, including the resumption of student loan payments next month, rising energy costs threatening core inflation’s slowdown, consumer fatigue from high inflation and the delayed effects of previous rate hikes on the broader, real economy.
In his post-meeting news conference, Fed Chair Jerome Powell said a soft landing “was a plausible outcome” and that a soft landing could be jeopardized by “factors that are outside of our control.”
After a reporter’s question suggested that a soft landing isn’t a goal of the Fed’s, Powell said the central bank has always been aiming to achieve the elusive soft landing.
“To begin, a soft landing is a primary objective and I did not say otherwise. That’s what we’ve been trying to achieve for all this time,” he said. “The real point, though, is the worst thing we could do was to fail to restore price stability because the record is clear on that. If you don’t restore price stability, inflation comes back.”
Markets stumbled after Powell’s remarks on the soft landing possibility.
Powell’s assessment of growth and rising energy prices
So far, the economy has been remarkably resilient in the face of the Fed’s most aggressive inflation-busting campaign since the 1980s. Robust spending on travel, concerts and films fueled the economy during the summer, but it remains to be seen whether that momentum will continue.
That led Fed officials to revise up their projections of economic growth this year and next year. The median projection for GDP growth this year came in at 2.1%, versus the 1% rate projected in June, and officials revised up their projections of growth in 2024 as well.
Powell has said the central bank needs to see “below-trend growth” and for the job market to come into better balance in terms of demand and supply. But he said at Wednesday’s news conference that the Fed isn’t looking at GDP in isolation.
“GDP is not a mandate — maximum employment and price stability are the mandates,” Powell said. He said that officials determine whether the strength of GDP is “a threat to our ability to get back to 2% inflation.”
Economists widely expect slower growth this year, rather than an economic slump.
Another risk that emerged recently is volatility in energy markets. A combination of production cuts from oil-exporting nations and supply disruptions due to a deadly flooding in Libya helped push up gas prices in recent weeks.
The national average for regular gasoline stood at $3.88 a gallon on Wednesday, according to AAA, the highest since October 2022. The Consumer Price Index rose 3.7% in August from a year earlier, up from July’s 3.2% rise, with gas prices being the largest contributor to that acceleration.
Rising energy prices, if elevated for long enough, could eventually feed into core inflation by making services such as freight and air transportation more expensive. Powell said as much during his presser.
“Energy prices being higher, that is a significant thing,” Powell said. “Energy prices being up can affect spending over time, a sustained period of higher energy prices can affect consumers’ expectations about inflation. We tend to look through short-term volatility and look at core inflation, so the question is, how long will those higher prices sustain?”
Some economists expect demand to slow the rest of the year, helping ease some upward pressure on gas prices.