The US Federal Reserve announced on Wednesday that it would maintain its current interest rates, but indicated that it expects borrowing costs to increase by another 0.5% by the close of this
year. The decision comes in response to a stronger-than-anticipated economy and a slower decline in inflation.
The Federal Open Market Committee (FOMC), responsible for setting rates, stated in a unanimous policy statement at the conclusion of its latest two-day meeting that keeping the target interest rate range unchanged allows them to assess additional information and its implications for monetary policy while balancing risks to the economy and ongoing inflation concerns.
The FOMC also mentioned that future rate hikes will consider the cumulative impact of monetary policy tightening, the lag effect on economic activity and inflation, as well as economic and financial developments.
Following the release of the Fed's statement, Chairman Jerome Powell stated that most Fed officials anticipate further rate increases this year. While no decisions have been made regarding future rates, Powell noted that the July FOMC meeting is considered a "live meeting," indicating the possibility of another rate hike.
The Fed's updated projections reveal a more hawkish stance, with policymakers predicting the benchmark overnight interest rate to rise from the current range of 5.00% to 5.25% to a range of 5.50% to 5.75% by year-end. Out of the 18 Fed officials, half projected their "dot" at that level, and three officials even foresee the policy rate surpassing 6%.
However, two officials believe rates will remain unchanged, while four officials view a single additional quarter-percentage-point increase as appropriate.
Looking ahead to 2024, policymakers anticipate 100 basis points of rate cuts, alongside a decline in inflation.
The combination of the rate outlook and projections is likely to lead investors to expect quarter-percentage-point rate increases to resume starting at the next policy meeting in July, as the Fed adjusts its rate policy on a meeting-by-meeting basis.
In response to the decision, US stocks experienced a decline, and futures contracts tied to the policy rate now reflect a roughly 75% chance of another rate hike next month, with the probability of a rate cut by year-end decreasing.
Sam Stovall, chief investment strategist at SFRA Research, commented, "It does seem as if the FOMC members have become even more hawkish since the last meeting, and I think that has taken investors by surprise."
IMPROVED ECONOMIC OUTLOOK
The revised rate outlook coincides with an improved economic outlook, resulting in slower progress in achieving the central bank's 2% inflation target.
The median projection by Fed officials for 2023 economic growth was more than doubled from 0.4% to 1%, compared to the March projections. Additionally, the projected unemployment rate at the end of the year was revised downward to 4.1%, while the May rate stood at 3.7%, compared to the previous projection of 4.5% in March.
Due to the stronger-than-expected economy, inflation is expected to decline at a slower pace. The core Personal Consumption Expenditures Price Index is projected to decrease from the current 4.7% to 3.9% by the end of 2023, compared to the previous projection of 3.6% in March.
The decision breaks a streak of 10 consecutive rate hikes, which were implemented by the Fed to combat the most significant inflation outbreak in four decades, including four substantial increases of 0.75% each last year. Photo by Rdsmith4, Wikimedia commons.