Key Insights
- The Federal Reserve left interest rates unchanged at 5.25-5.5% after recent aggressive hikes to combat inflation.
- The Fed signaled rates may need to stay higher for longer despite early signs of inflation easing.
- Updated projections point to higher rates in 2023 as the Fed maintains a hawkish stance to return inflation to its 2% target.
The Federal Reserve left interest rates unchanged on Wednesday amid signs of economic resilience, signaling an extended tightening campaign ahead to combat stubborn inflation.
In a unanimous vote, the Fed held its benchmark federal funds rate steady in a target range of 5.25-5.5% following four straight 75 basis point hikes this year. Rates have now been on hold at their highest level since 2007.
The decision to stand pat comes as inflation shows early signs of easing from 40-year highs, though it remains well above the Fed’s 2% target at 6.2% annually.
In updated economic projections, officials saw rates rising higher than expected in 2023 as the central bank maintains its hawkish stance. Markets continue to price in rate cuts only in 2024.
The Fed reinforced that rates will need to stay higher for longer to bring inflation down, said Ryan Sweet of Oxford Economics. Fed officials are not out of the woods yet.
More upbeat assessments of economic growth and the labor market also signal the Fed believes there is room to push rates higher if needed. GDP grew solidly at a 2.6% pace last quarter despite rate hikes.
But the Fed threaded a careful line, noting financial conditions have tightened significantly as Treasury yields surge on rate hike expectations.
Ongoing increases in interest rates, slower growth overseas, and geopolitical tensions may restrain the demand for U.S. products, Fed Chair Jerome Powell cautioned.
For now, the Fed appears set to push forward with its restrictive policy even as recession risks flash warnings. But flexibility remains key as the central bank feels its way in an increasingly murky environment.