The move to leave its benchmark rate at about 5.4% suggests that the Fed thinks it has time to wait and see if the 11 rate hikes it unleashed starting in March 2022 will continue to cool rising prices.
Consumer inflation has dropped from a year-over-year peak of 9.1% in June 2022 to 3.7% last month. Yet it’s still well above the Fed’s 2% target, and its policymakers made clear Wednesday that they aren’t close to declaring victory over the worst bout of inflation in 40 years.
Besides forecasting another hike by year’s end, their projections showed they envision keeping rates high deep into 2024. They expect to cut interest rates just two times in 2024, down from four rate cuts they had envisioned back in June.
The policymakers’ inclination to keep rates high for an extended period suggests that they remain concerned that inflation might not be falling fast enough toward its 2% target.
The Fed’s rate hikes have significantly raised the costs of consumer and business loans. In fine-tuning its interest rate policies, the central bank is trying to guide the US economy toward a tricky “soft landing” of cooling inflation without triggering a deep recession.Even as inflation has slowed significantly, the job market and the economy have remained resilient, confounding expectations that the Fed’s series of hikes would cause widespread layoffs and a recession.The more measured approach to rate increases the Fed is now taking reflects an awareness among the officials that the risks to the economy of raising rates too high is growing. Previously, they had focused more on the risks of not doing enough to slow inflation.
The Fed’s moves underscore that even while the policymakers approach a peak in their series of hikes, they intend to keep rates at or near their high for a prolonged period.
In generating sharply higher interest rates throughout the economy, the Fed has sought to slow borrowing – for houses, cars, home renovations, business investment and the like – to help ease spending, moderate the pace of growth and curb inflation.
Though clear progress on inflation has been achieved, gas prices have lurched higher again, reaching a national average of $3.88 a gallon as of Tuesday. Oil prices have surged more than 12% in just the past month.
And the economy is still expanding at a solid pace as Americans, buoyed by steady job growth and pay raises, have kept spending. Both trends could keep inflation and the Fed’s interest rates high enough and long enough to weaken household and corporate spending and the economy as a whole.