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Federal Reserve officials on Wednesday signalled support for another rate rise this year and fewer cuts in 2024 even as the US central bank held its benchmark interest rate steady at a 22-year high.
The Federal Open Market Committee opted against an interest rate increase following its latest two-day meeting and voted unanimously to hold the federal funds rate between 5.25-5.5 per cent. That was in keeping with the US central bank’s strategy of moving more carefully in the latter stages of its fight against inflation.
Since March 2022, the Fed has pursued one of the most aggressive campaigns to choke off consumer and business demand in decades in a battle against price pressures that have proven far more persistent than expected.
In a statement, the committee said it remained “highly attentive to inflation risks”, noting that economic activity had been expanding at a “solid pace” and that jobs gains, while slower, were “strong”.
The Fed on Wednesday also released a new set of individual economic projections from its policymakers, which forecast stronger growth this year and a more benign inflation outlook compared with previous estimates released in June.
The projections, known as the dot plot, also signalled support for the funds rate to peak between 5.5-5.75 per cent — translating to one more quarter-point rate rise this year — while pencilling in fewer interest rate cuts for 2024 and 2025.
The two-year Treasury yield, which moves with monetary policy expectations, rose to its highest level since 2006 following the Fed statement, as investors priced in the prospect of an additional interest rate rise this year. In the futures market, traders were evenly divided on the chances that the Fed would raise interest rates again by the end of 2023.
Most policymakers now project the fed funds rate will hover between 5-5.25 per cent by the end of 2024, up from 4.6 per cent in June. They expect fewer cuts in 2025, with the median estimate for the benchmark rate revised up to 3.9 per cent from 3.4 per cent. Policymakers also submitted their first forecasts for 2026, predicting a year-end policy rate of between 2.75-3 per cent.
The median estimate of the “neutral” rate, reflecting the level whereby growth is neither buoyed nor depressed, was unchanged at 2.5 per cent, although several officials pencilled in a higher level.
Officials’ median estimate for gross domestic product growth by year end increased significantly to 2.1 per cent from 1 per cent and was again revised higher by 0.4 percentage points for 2024 to 1.5 per cent.
They also lowered their forecasts for core inflation to 3.7 per cent for 2023, having previously predicted 3.9 per cent. For 2024 they left their forecasts unchanged at 2.6 per cent, while forecasting that inflation would only revert to the Fed’s 2 per cent target by 2026.
The unemployment rate is now projected to reach just 4.1 per cent by 2024, a lower peak compared to June.
But it is far from guaranteed that the Fed will follow through with further tightening, given the risks some officials see facing the US economy.
Officials are also aware that the impact of months of higher interest rates may only be becoming evident now, such as in the cooling of the US labour market.
Fresh challenges to growth have also emerged, including the resumption of student loan repayments, an unresolved autoworker strike and a looming government shutdown. A surge in oil prices stemming from recent supply cuts has also caused concern, amid fears it could lift the costs of goods and services.
Traders in fed funds future markets are betting the Fed will hold rates at current levels until well into 2024. But a recent poll of leading academic economists conducted by the Financial Times and the University of Chicago’s Booth School of Business showed most thought the central bank had more work to do to beat back inflation.
