Fed Pauses Interest Rate Increases but Suggests More Are Ahead

Federal Reserve officials left interest rates unchanged on Wednesday, skipping an increase after raising rates 10 times in a row since March 2022. Still, policymakers predicted that they might need to raise rates two more times this year as inflation, while moderating, remains stubborn.

Fed officials, in their policy statement, said that they were giving themselves time to assess how the economy was reacting to what has been a rapid campaign to slow demand and wrestle fast inflation under control. The central bank had already raised rates to a range of 5 to 5.25 percent over a little more than a year.

But policymakers also predicted in their economic forecasts that they might raise interest rates even further — to 5.6 percent by the end of 2023. That would amount to two more quarter-point rate increases over the course of the Fed’s four remaining meetings this year. The projections sent a clear signal that Fed officials are increasingly worried about inflation’s staying power and will need to do more to cool growth and bring price increases under control.

“The process of getting inflation down is going to be a gradual one — it’s going to take some time,” Jerome H. Powell, the Fed chair, said at a news conference after the decision. But, given how much rates have already risen, he also added that “stretching out into a more moderate pace is appropriate.”

Fed officials are moving into a new and more patient stage of their war against inflation, which began to accelerate in 2021. But Mr. Powell made clear on Wednesday that the decision to skip an increase this month did not mean the Fed was giving up on its push to tame price increases.

The rate moves that the Fed has already made are still trickling through and weighing on the economy. And the prospect of even higher borrowing costs could keep lenders and consumers cautious, helping to slow economic growth.

“The Fed is trying to have their cake and eat it too,” said Gennadiy Goldberg, a rates strategist at TD Securities, explaining that pausing is giving officials a chance to proceed more carefully even as their projections signal that they may ultimately be more aggressive. “The problem is: Can they convince markets?”

Stocks fell sharply after the Fed’s policy statement and economic projections were released, but recovered during Mr. Powell’s news conference, as he emphasized that the forecasts are estimates and not a promise of future rate changes.

Investors expect one more rate move this year, most likely when the Fed meets again on July 25 and 26 — but less than what Fed policymakers are predicting.

When Fed officials raise interest rates, it makes mortgages and business loans more expensive. That causes consumers and firms to pull back and, in theory, should force companies to stop raising prices so much.

But 15 months into the Fed’s push to slow growth and inflation, the economy is proving surprisingly resilient. Consumer spending has slowed, but it hasn’t tanked. Wage gains are a bit more moderate, but companies are still hiring.

And as the economy chugs along, inflation is sticking around. Overall price increases have slowed notably as fuel costs have come down and grocery price increases have moderated. But inflation remains very rapid after stripping out those two volatile products. The downshift in that “core” measure has been much more halting.

“You’re just not seeing a lot of progress,” Mr. Powell said on Wednesday. “We want to see it moving down decisively.”

The Fed’s economic projections come out every three months, making these the first since March — and they reflected the deepening inflation worry. The fresh forecasts suggested that 2023 could end with inflation at 3.9 percent after stripping out food and fuel prices. That projection was much higher than the 3.6 percent officials had forecast in March.

That inflation measure stood at 4.4 percent in April. A related and more up-to-date inflation gauge — the Consumer Price Index — reinforced this week that while overall inflation was coming down, the core measure remained very sticky.

Consumer price increases were back down to 4 percent after surging to about 9 percent last summer, but on a core basis they remained much quicker, at 5.3 percent.

Still, the Fed is trying to strike a delicate balance.

Officials are adamant that they need to bring hot inflation back under control in a timely manner, even if that comes at a cost to the labor market. The economy as a whole can only achieve a stable footing if inflation comes down, Mr. Powell emphasized on Wednesday.

And doing too little could come at a real cost. If policymakers fail to bring inflation under control in a timely way, consumers and business could come to expect steadily higher prices and adjust their behavior accordingly: Workers could ask for bigger annual wage increases, firms could push prices up more regularly, and in general it could become harder to stamp out price increases.

But central bankers also want to avoid lifting rates too much and plunging the economy into an unnecessarily steep slowdown. Doing so would cost Americans their jobs and undermine financial security for families across the economy.

That’s why central bankers are moving more slowly. Nudging rates up cautiously could give officials a chance to take more data into account before it makes decisions — helping to avoid overdoing the adjustment, without throwing in a white flag.

“We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt,” Mr. Powell said. He said that no decisions on the timing of future rate increases had been made, but added that July would be a “live” meeting — meaning that officials could well raise rates.

The question is whether the economy can avoid a recession with rates this high and poised to climb further. Fed officials still think that there is a path to cooler inflation without a painful recession that costs lots of workers their jobs — even if it’s a narrow one.

“It’s possible — in a way a strong labor market that gradually cools aids that along,” Mr. Powell said. But he also emphasized that the primary focus now is on bringing inflation back under control.

“We understand that allowing inflation to get entrenched in the U.S. economy is the thing that we cannot allow to happen,” Mr. Powell said, adding that the inflation outcome will matter for “generations” of Americans and is the Fed’s “top priority.”

Joe Rennison contributed reporting.


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