The Fed's Hawkish Pause

The Federal Reserve held steady on Wednesday in its battle against inflation while signaling that another interest rate could be coming later this year and rates could stay higher for longer than some analysts expect.

The Federal Open Market Committee announced that it would maintain its benchmark interest rate in a range between 5.25% and 5.50%. But a majority of committee members (12 of 19) said they expect to raise rates again this year, and projections for next year show that committee members expect the key rate to be 5% at the end of 2024, suggesting that officials think there will be only two rate cuts next year, with rates remaining relatively high throughout.

At a press conference following the announcement, Fed Chair Jerome Powell told reporters that while there clearly has been progress in the effort to reduce inflation, he wants to see “convincing evidence” that the central bank has gained the upper hand before deciding that interest rates are high enough – or, as he put it, “sufficiently restrictive.”

“The process of getting inflation sustainably down to 2% has a long way to go,” Powell said. “We’ve seen progress, and we welcome that, but we need to see more progress” before declaring that the Fed has done its job.

At the same time, Powell said that he thinks the central bank is “fairly close” to where it needs to be.

What the experts are saying: Noting that the latest projections from Fed officials show a median unemployment rate in 2023 of 3.8%, down from 4.1% previously, University of Michigan economist Justin Wolfers said that the Fed “is feeling more optimistic” about the course of the economy. Wolfers also pointed out that the Fed has reduced its unemployment projection for 2024-2025 to 4.1%, down from 4.5% previously, and lowered its estimate for core inflation in the fourth quarter of 2023 to 3.7%, down from 3.9% previously.

Joseph Brusuelas, chief economist at RSM, was feeling optimistic, too, as he read the tea leaves of the Fed’s announcement. “No rate hike & Fed is likely done,” he said on social media. “Soft landing is baseline forecast and two rate cuts in the forecast for 2024.”

The Washington Post’s Heather Long picked up on the soft-landing theme, saying that the Fed’s outlook is consistent with that possibility, in which inflation returns to something like normal without a recession occurring. “The Fed is starting to believe in a 'soft landing',” she wrote – despite Powell’s effort to avoid using that framing in the press conference today. Asked if a soft landing is now expected, Powell said, “No, no, I would not do that. But I do think it is possible.”

Still, a stronger-than-expected economy could be what convinces the Fed to raise rates again one more time. “A resilient US economy and high consumer spending over the next several months will likely prompt the Fed to raise rates again heading into the new year,” said Frank Lietke, executive director at Ally Invest Securities.

The bottom line: The Fed is sticking to its current path while remaining open to changes ahead, depending on what the data says. But Fed officials are growing more optimistic in their projections for the economy, even as they expect to hold interest rates higher for longer into next year.