The Federal Reserve, as expected, left interest rates unchanged following its two-day meeting in a decision released Wednesday afternoon.
The move isn’t a reversal of the current tightening cycle but rather a pause, with the Fed indicating that at least one more rate hike is expected later in 2023. Such a move would be the 12th increase since the current cycle started in March 2022.
According to the central bank’s dot-plot projections, one additional cut is likely this year followed by a pair of cuts in 2024. That’s actually two fewer cuts than projected after the Fed’s last meeting in June, indicating that interest rates will likely remain higher for an extended period of time.
Specifically, 12 Fed members expressed approval of an additional hike this year, while 7 opposed.
Inflation, which has been an ongoing target of the Fed’s tightening cycle, clocked in at 4.2% in July, still well above the 2% target.
In his remarks Wednesday afternoon, Chairman Jerome Powell said there is more work to be done.
“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion,” Powell said.
For now, rates remain in a target range of 5.25% to 5%, the highest level in more than two decades. Looking ahead, the median rate projection for 2025 rose to 3.9% from 3.4%.
Committee members also issued improved economic growth projections. The central bank now expects US GDP to rise 2.1% this year, more than double its estimate in June. The 2024 GDP estimate jumped to 1.5% from 1.1%.
Powell said the more positive economic outlook influenced the Fed's decision to project a pair of rate cuts in 2024.
“Broadly, stronger activity means we have to do more with rates, and that’s what that meeting is telling you,” Powell said.
One thing that could complicate matters is a government shutdown, which is looming at the end of September if a budget deal isn't reached. That would mean the central bank would be without access to some of the economic data it uses to make decisions.
A government shutdown could limit the access the Federal Reserve has to inflation data it would typically use to help make its November rate decision.
“If there is a government shutdown and it lasts through the next meeting, then it’s possible we wouldn’t be getting some of the data that we ordinarily get,” Powell said. “We would just have to deal with that,” Powell added. “It’s hard for me to say in advance how that would affect that meeting. It would depend on all kinds of factors.”
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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