After its sharpest flurry of interest rate hikes in four decades, the Federal Reserve held its key rate steady Wednesday but signalled two more increases are likely this year as officials continue to battle high inflation. That’s more projected hikes than financial markets and many economists anticipated. The decision leaves the benchmark rate at a range of 5% to 5.25%. It marks the first meeting at which the central bank hasn’t raised its federal funds rate since January 2022. Fed policymakers estimate they’ll push up the key rate by another half percentage point to a range of 5.5% to 5.75% in 2023, according to their median forecast. Financial markets and many economists expected the Fed to forecast just one more quarter point hike in July. That still would have been higher than the peak rate Fed officials predicted in March. By next year, however, the central bank expects to cut rates to 4.6% amid a weak economy and lower inflation.
“Holding the target range steady at this meeting allows the (Fed) to assess additional information and its implications for monetary policy,” the Fed said in a statement after a two-day meeting. The central bank added that it will determine “the extent of additional policy firming that may be appropriate” to lower inflation to the Fed’s 2% target based on the lags with which its rate hikes affect the economy, inflation and economic and financial developments. Inflation is running at 4.4%, according to the Fed’s preferred measure. The Fed’s decision to stand pat is set to provide a reprieve to consumers who have been socked with steady increases in rates for credit cards, adjustable-rate mortgages and other loans. Yet Americans, especially seniors, have benefited from the hikes by finally reaping higher bank savings yields after years of meagre returns.
Two more quarter point bumps are possible because officials expect faster growth and more persistent inflation than they previously forecast, potentially providing more reason to nudge rates higher. Officials expect their preferred measure of annual inflation to decline from 4.4% in April to 3.2% by year-end, below the March estimate of 3.3%, according to their’ median forecast. But a core measure that strips out volatile food and energy items and that the Fed follows more closely is expected to close out the year at 3.9%, above from the prior 3.6% estimate. The economy is expected to grow a modest 1% in 2023, more rapidly than the previous 0.4% projection, and 1.1% next year. And the 3.7% unemployment rate is forecast to rise to 4.1% by the end of the year, below the 4.5% previously forecast. After lifting rates at 10 straight meetings since March 2022 – by a total 5 percentage points — Fed officials have been split over whether to pause Wednesday or continue to push rates higher.
Last month, Fed Chair Jerome Powell suggested there was a good chance they would take a break to assess the delayed effects of a hiking campaign that most forecasters believe will cause a mild recession this year. Powell also said deposit runs that sparked the collapse of three regional banks have toughened lending standards and could further ding growth, leaving the Fed less work to do. But he said the Fed’s actions would depend on how the economy evolves. A report Tuesday revealed that another inflation measure – the consumer price index—showed a significant slowdown in May to 4% annually from 4.9% in April and a 40-year high of 9.1% last June. But a core measure that strips out volatile food and energy items advanced sharply from April, keeping the yearly rise elevated at 5.3%.
Also, employers added a booming 339,000 jobs in May. Annual wage growth ticked down from 4.4% to 4.3% but that’s still historically high and could continue to fuel inflation as employers pass higher labor costs to consumers. Consumer spending, which makes up 70% of economic activity, also has been robust as households rely on pandemic era savings to offset high borrowing costs and inflation. The persistence of inflation has led some Fed policymakers to call Wednesday’s decision to stand pat a “skip” rather than a “pause,” noting a July increase was a good bet. Others have noted the biggest impacts from the Fed’s rate increases so far have yet to be felt. They also expect inflation to fall substantially closer to the Fed’s 2% goal by the end of the year as rent increases slow. They believe the Fed should stand down to avoid a recession. No.
During the pandemic, households accumulated about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures. As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of that extra cash but about $1.5 trillion still remains, according to Moody’s Analytics. Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has waned. So while consumption has weakened, rising just 1% annualised at the end of last year, it bounced back and grew 3.8% in the first three months of the year. Also, both households and businesses have historically low amounts of debt, Moody’s says, and so they’re not weighed down by high monthly debt service payments.
