The U.S. Federal Reserve has maintained its benchmark overnight interest rate during a two-day policy meeting, signaling a hawkish monetary policy stance aimed at combating inflation without causing significant economic disruption or job losses.
The Fed’s benchmark rate may still see one more increase this year, reaching a peak of a 5.50 percent–5.75 percent range, according to updated quarterly projections.
Fed Chair Jerome Powell emphasized the Fed’s commitment to tackling inflation, noting that a “solid” economy and “strong” job growth would allow them to maintain tighter financial conditions through 2025 with less economic and labor market impact. This shift in policy aims to combat inflation, which is expected to persist until 2026.
While inflation is projected to decrease for the rest of 2023 and the coming years, the Fed anticipates only modest initial reductions to its policy rate. This means that the expected half-percentage point rate cuts in 2024 would effectively raise the inflation-adjusted “real” rate.
Powell stressed that the Fed was proceeding carefully with future policy moves but indicated that a definitive judgment on the appropriate interest rate level to achieve the Fed’s 2 percent inflation target had not yet been made.
Bond yields rose, and major U.S. stock indices fell in response to the latest Fed projections and policy statement. The 2-year Treasury note reached a roughly 17-year high, near 5.2 percent.
While Powell maintained strict language on inflation, there appears to be a growing belief among U.S. central bankers in the possibility of a “soft landing.” Projections show that Fed policymakers expect inflation to continue falling while GDP grows and the unemployment rate remains low, contrary to historical trends.
The median GDP forecast among policymakers for 2023 is now 2.1 percent, significantly higher than at the beginning of the year. The central bank expects inflation to return to its 2 percent target by 2026.
Investors had anticipated significant rate cuts next year, but the projections reveal that 10 of 19 officials see the policy rate remaining above 5 percent through next year. This suggests tighter credit conditions and higher borrowing costs for companies and households, impacting credit card rates, auto loans, and home mortgages.
The Fed’s statement was unanimously approved, marking new Fed Governor Adriana Kugler’s debut in policymaking.