Yahoo Finance Federal Reserve leaves interest rates unchanged at 22-year high, signals one more hike in '23
The Federal Reserve held interest rates steady at a 22-year high on Wednesday while signaling another rate hike will be needed later this year to bring inflation back to its 2% target.
The central bank maintained the range for its benchmark interest rate at 5.25%-5.5%, but held projections for interest rates to finish the year in a range of 5.5%-5.75%, implying one more rate hike this year.
Twelve members of the FOMC saw one more rate hike needed this year while seven members wanted to keep rates at current levels through year-end.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Officials now see interest rates falling by 0.5% next year from the expected peak rate range of 5.5%-5.75%, implying holding rates at higher levels for longer than forecast earlier this year. In June, officials penciled in a full percentage point worth of rate cuts for 2024.
The Fed's preferred inflation measure — the Personal Consumption Expenditures (PCE) Index that excludes the cost of food and energy, or so-called "core" PCE — rose 4.2% over the prior year in July, up from 4.1% in June but down from the range of 4.5%-4.6% for the first half of the year.
Another gauge of inflation — the Consumer Price Index on a "core" basis — rose 4.3% in August, slowing from 4.7% in July, its slowest pace since October 2021.
"It’s more about stronger economic activity," Fed Chair Jerome Powell said at a news conference Wednesday, when asked about the forecasted need for another rate hike by the end of the year, "if I had to attribute one thing."
"Broadly, stronger economic activity means we have to do more with rates."
Fed officials noted they still view inflation as "elevated," and that they remain "highly attentive" to inflation risks. Still, officials lowered their outlook for inflation, which they now see ending the year at 3.7% from 3.9% forecast in June. Officials see inflation falling even lower next year to 2.6%, in line with forecasts from June.
"We want to see that these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than three months," Powell said at his news conference.
The Fed acknowledged that job growth has slowed, and the central bank now sees unemployment clocking in lower this year at 3.8%, down from the 4.1% previously forecast, and holding at that level through 2025.
The outlook for GDP was revised higher for the year to 2.1%, up from 1% previously. Next year’s outlook was also raised to 1.5% from 1.1%.
Fed officials are proceeding cautiously as they mull future actions and take more time to digest cooling inflation data and weigh the risk that inflation will be too high against the risk of dampening the economy too much.
"We are fairly close, we think, of where we need to get," Powell said Wednesday, adding that "the worst thing we can do is fail to restore price stability because the record is clear on that. If you don’t restore price stability inflation comes back and you can have a long period where the economy is just very uncertain."
“It can be a miserable period to have inflation constantly coming back and the Fed coming in and having to tighten again."
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