MNI: FOMC Holds Rates; Sees 1 More Hike, Fewer Cuts Next Year

The Federal Reserve left interest rates steady at 22-year highs Wednesday but kept the door open to one more increase in borrowing costs this year, while reducing the number of rate cuts officials see in 2024. 

After leaving the federal funds rate in a 5.25%-5.5% range, FOMC members penciled in another quarter-point rise this year in their quarterly Summary of Economic Projections. They also slashed in half – to two from four – the number of expected rate cuts next year. 

“The committee will continue to assess additional information and its implications for monetary policy,” the Fed said its post-meeting statement. "The committee remains highly attentive to inflation risks."

Twelve policymakers penciled in another 2023 rate hike while seven saw the Fed as already done, highlighting a growing split inside the committee.

The median view of the longer-run rate of interest, seen as a proxy for the neutral rate, was steady at 2.5%, although the distribution of projections showed a growing number of officials think the neutral rate has risen.

STRONGER GROWTH

Fed officials sharply boosted their growth forecasts, to 2.1% for this year from a June projection of 1.0%. In 2024, officials see GDP expanding 1.5%, up from 1.1% in June.

The Fed started raising interest rates in March 2022 in response to a post-Covid surge in inflation, and lifted them aggressively at one of the fastest clips in history, by 525 basis points in less than 1-½ years.

Policymakers have been hopeful that they can stop raising interest rates soon and simply keep them “higher for longer” while inflation hopefully continues to fall gradually toward the central bank’s 2% target. 

The August CPI report was a disappointment from that perspective, with consumer prices rising a stronger-than-expected 0.3% on the month, leaving headline CPI 3.7% higher on the year while prices excluding food and energy climbed 4.3%. A rebound in oil prices to over USD90 per barrel has also raised concerns about renewed inflation persistence. 

Inflation forecasts were modestly revised in the SEP, with core PCE seen ending the year at 3.7% versus 3.9% in June. Fed officials don’t see inflation returning to 2% until 2026, according to their estimates.

Policymakers see unemployment ending the year where it stood in August – at 3.8%. That’s down from a forecast of 4.1% in June. Joblessness peaks at just 4.1% in 2024 and 2025. 

Fed Chair Jerome Powell will take questions from reporters starting at 2:30 pm ET. He is expected to discuss his views on the threshold for any additional hikes and elaborate on the practical implications of a “higher for longer” interest rate policy.