Federal Reserve pauses rate rise campaign but signals more to come

The Federal Reserve held its benchmark interest rate steady for the first time in more than a year following 10 consecutive increases but signalled its intention to implement further rises this year.

At the end of its two-day gathering on Wednesday, the Federal Open Market Committee voted unanimously to forgo another quarter-point rate increase and kept the federal funds rate at the existing target range of between 5 per cent and 5.25 per cent.

The pause marked the first reprieve in the US central bank’s aggressive monetary tightening campaign since it first started raising rates in March 2022 and ushered in a new phase in its battle against stubbornly high inflation.

In a statement released on Wednesday, the FOMC said that skipping a rate rise would allow officials to “assess additional information and its implications for monetary policy”.

The Fed also released an updated “dot plot” that collates officials’ forecasts for the fed funds rate until the end of 2025. It indicated that most policymakers are projecting two more quarter-point increases this year, in a move that would lift the benchmark rate to 5.5 per cent to 5.75 per cent.

In a press conference following the decision, Fed chair Jay Powell said: “Nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation to 2 per cent over time.”

The Fed could implement an additional rate rise as early as next month, when its policy setting committee is scheduled to meet again. For that reason, economists said its decision to hold rates steady on Wednesday amounts more to a “skip” than a “pause”.

Powell on Wednesday said he expected the meeting in July to be a “live” one, sending a strong hint that the Fed is inclined to increase rates next month unless economic data convinces it to pull its punches again.

The Fed needed “credible evidence that inflation is topping out and then beginning to come down” before concluding it had squeezed the economy sufficiently, Powell added, noting there had been little progress in bringing core inflation down in recent months.

However, Powell said it was “prudent” to skip a rate rise this time round given how much the central bank has already tried to damp economic activity. He also said the committee had taken into account “potential headwinds” stemming from the recent US regional banking crisis.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Most officials forecast that the fed funds rate would decline to 4.6 per cent in 2024 and 3.4 per cent in 2025, both above the respective March estimates. That suggests the Fed intends to keep monetary policy tighter for longer as it tries to tame inflation.

US stocks slipped following the FOMC’s projections while investors in the Treasury market increased their bets that rates would stay higher for longer. The two-year Treasury note, which moves with interest rate expectations, rose to its highest level since mid-March. Traders in the futures market pared back wagers that the Fed will cut rates this year.

In March, when the dot plot was last updated, most policymakers projected the central bank would not raise rates beyond the current level, in large part because of the aftershocks from the failure of Silicon Valley Bank and other lenders.

The Fed is facing the tricky task of determining how much more to squeeze the economy amid uncertainty about the degree to which a credit crunch will weigh on growth and hiring. Officials are also assessing the cumulative effect of their monetary tightening given that rate rises take time to be fully felt in the real economy.

In its statement on Wednesday, the FOMC said it would take into account the cumulative effect of rate rises so far and the delayed effects of monetary tightening on the economy to determine the “extent of additional policy firming”. It also said it would consider data on inflation and the strength of the financial system.

Powell said last month that the central bank could afford to look at the data and make “careful assessments” in terms of the path forward for policy.

Since then, the economic picture has been mixed and has stoked an intense debate among officials over if and when more rate rises will be needed. Economists polled by the Financial Times last week believed the central bank would raise rates at least two more times this year to between 5.5 per cent and 6 per cent.

The latest consumer price index report, released on Tuesday, showed a deceleration in annual inflation despite persistent price pressures across many segments of the economy. The labour market has lost some momentum but remains very strong, encouraging consumers to keep spending.

According to the projections released on Wednesday, most officials now project “core” inflation, based on the personal consumption expenditures price index, to decline to 3.9 per cent this year before further slowing to 2.6 per cent in 2024 and 2.2 per cent in 2025.

That suggests inflation will fall more slowly than compared with previous forecasts released in March, when the median estimate for core PCE in 2023 was 3.6 per cent. It is currently hovering at 4.7 per cent.

Officials also pencilled in much higher growth this year, with the economy expanding by 1 per cent. That is sharply above the 0.4 per cent estimate released in March.

The unemployment rate is expected to peak at 4.5 per cent in 2024, just shy of the earlier 4.6 per cent forecast.

As of May, Fed staffers had a more downbeat view, however, forecasting a “mild” recession this year.

Additional reporting by Kate Duguid