MNI: Fed Holds Rates Steady But Points To Likely Future Hikes

The Federal Reserve kept interest rates on hold Wednesday for the first time since March of last year as it tries to gauge the full effect of its aggressive hiking campaign on the economy and credit conditions, but officials suggested more rises to come as they boosted their forecasts for where borrowing costs will peak.

FOMC members raised their projections for where the federal funds rate will end the cycle to a median 5.6% from 5.1% at the March meeting, implying at least two more quarter-point hikes may be forthcoming this year.

"Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy," the FOMC said after leaving official rates in a target range of 5%-5.25%, the highest level in 15 years.

The FOMC repeated that it would take policy lags into account in determining the “extent of additional policy firming.”

The Fed is now at its most divided since it started raising rates in March 2022, with some officials arguing further tightening is needed in the face of stubborn inflation, while others, more keenly focused on the traditional lag time of monetary policy effects on growth and inflation, would prefer to take a breather on rate increases for now. Two of 18 officials would prefer no further changes in rates this year. Still, the decision to hold rates for now was unanimous.

The more dovish camp within the FOMC also worries that the regional banking turmoil in March may have yet to be fully felt in terms of tighter credit conditions.

Futures markets ahead of the decision were pricing in a nearly 60% chance of a resumption of hikes in July.

INFLATION FALLING, BUT STILL TOO HIGH

The decision comes against the backdrop of an inflation picture that has been improving but is still a far cry from the central bank's official 2% target. CPI inflation slipped to a two-year low of 4.0% in May but core inflation remained quite elevated at 5.3%.

The job market, meanwhile, has shown scant signs of slowing, with payroll growth exceeding expectations for a 14-month straight month in May as employers added 339,000 new positions. The jobless rate rose to 3.7% but only after hovering for months around a 50-year low.

FOMC participants raised their estimate for year-end core inflation to 3.9% from 3.6% in March. They also lowered their view of the fourth quarter employment to 4.1% from 4.5%.

Fed Chair Jerome Powell will take questions from reporters starting at 2:30 pm. He's likely to be asked how high the bar is for additional rate increases in the future, how much confidence he has that the economy can still avoid a recession and the extent to which a post-banking crisis credit crunch has been avoided.