WASHINGTON, June 14 (Reuters) – The Federal Reserve left interest rates unchanged on Wednesday, but noted in new projections that borrowing costs may still need to rise by up to half a percentage point by the end of this year, according to the US central bank. The Bank responded to a stronger than expected economy and a slower decline in inflation.
In a news conference at the end of the central bank’s latest monetary policy meeting, Fed Chairman Jerome Powell described US growth and the labor market as having held up better than expected under the weight of last year’s aggressive monetary tightening — which could lead to Fed prolongation. Fighting to bring down inflation but also to allow it to move forward while minimizing economic damage.
Powell said the pause was out of caution to allow the Fed to gather more information before determining whether rates need to rise again, as the pace of its moves is now less important than finding an appropriate endpoint that slows rate increases while minimizing any rally. in unemployment.
After a year in which many economists and analysts argued that a recession was imminent and the economy on the brink of collapse, according to the Fed’s latest quarterly projections, “growth estimates are up a little bit, unemployment estimates are down a little bit, and inflation estimates are up,” Powell said.
Taken together, the data suggests that “more restraint will be necessary than we thought,” Powell said of the new forecasts, which showed a uniform shift higher in policymakers’ expectations for interest rates for the year. Nine of the 18 officials see the overnight rate rising another half percentage point beyond the current range of 5.00%-5.25%, while three others feel it needs to rise even further.
But Powell also said he felt pieces of the inflation puzzle were beginning to undo, with the Fed focused on “policy correction” as it contemplates what might be its final rate increases before lower inflation allows for potential rate cuts next year.
“The conditions that we need to see … to bring down inflation are starting to fall into place,” Powell told reporters, including below-trend growth, a somewhat weaker labor market, and improvements in supply chains. But the process of working on inflation will take some time.”
It was a subtly upbeat message that tempered hawkish expectations that see the policy rate rise higher than market participants expected.
She believes that was not a mistake, said Subhadra Rajappa, head of US price strategy at Societe Generale, as the Fed now keeps its options open in case further rate increases are needed, but is not committed if inflation falls faster than expected. .
“The points are tight, but he’s done a good job of telling the markets not to see it that way,” she said.
In fact, investors in Fed policy rate bound contracts see the central bank offering a quarter-point increase of just one percentage point by the end of the year. And they see about a 65% chance of a rate hike next month, up only slightly from before this week’s meeting.
direct encounter
Although Powell repeated the Fed’s standard warning about the risks of “rising” inflation, the decision to hold steady at this time was also an attempt to moderate the pace of price increases “with minimal damage” to the labor market. The new projections showed the unemployment rate rising by the end of 2023 to 4.1% from the current 3.7%, but this is a much smaller increase than the 4.6% unemployment rate that officials predicted in March.
“Keeping the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy” before making a further move, the central bank’s FOMC said in a policy consensus. Statement at the end of its two-day meeting.
Powell said that while officials haven’t decided what to do with rates, the July 25-26 meeting is a “face-to-face meeting” that could lead to another hike.
“This looks like a meeting where the committee was split, everybody got something, nobody got everything. A dovish decision, a hard-line statement, very hard points,” wrote economists at the analytics firm Larry Meyer, former Fed governor. “In the end…although Powell was vague on many points, we see that his press conference was relatively peaceful.”
US stocks fell after the policy decision, but by the end of the day the Nasdaq Composite (.IXIC) and S&P 500 (.SPX) closed slightly higher. The Dow Jones Industrial Average (.DJI) fell 0.68%.
Stronger economic outlook
The Fed’s higher interest rate expectations coincide with an improved view of the economy and, therefore, slower progress in returning inflation to the central bank’s 2% target. It is currently more than twice that.
Fed officials on average more than doubled their forecast for economic growth for 2023 to 1%, from the 0.4% forecast in March.
The core PCE price index is expected to decline from the current 4.7% to 3.9% by the end of 2023, compared to the 3.6% year-end rate forecast by policymakers for March.
Wednesday’s policy decision snapped a streak of 10 consecutive rate hikes as the Fed responded to its worst outbreak of inflation in 40 years with a matching set of aggressive moves, including four whopping three-quarters of a percentage point hikes last year.
The central bank’s policy rate, which affects household and business borrowing costs across the economy, has risen a full 5 percentage points since the beginning of the tightening cycle in March 2022, reaching the highest level since before the start of the 2007-2009 recession.
(Reporting by Howard Schneider). Additional reporting by Bansari Mayur Kamdar. Editing by Chizu Nomiyama and Paul Simao
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