Washington, DC CNN — The Federal Reserve announced on Wednesday that it will pause its rate hikes, keeping its benchmark lending rate at a 22-year high. This move was widely anticipated, as the central bank has been signaling in recent weeks that it wants to wait for more data to understand the impact of previous rate hikes on the US economy. Since March 2022, the Fed has raised interest rates 11 times and held them steady twice. The Fed’s latest economic projections show that more officials expect the key lending rate to reach a range of 5.63-5.87% this year, indicating the possibility of another rate hike by the end of the year. Officials have revised their expectations for economic growth this year higher and their projections for the unemployment rate slightly lower. However, they now expect fewer rate cuts in 2024 compared to previous estimates, which confirms investors’ concerns that interest rates could remain high for a longer period.
“The new projections suggest that the Fed is confident in its outlook for a soft landing and that there will be minimal room for policy easing next year,” said Seema Shah, chief global strategist at Principal Asset Management, in an analyst note. “The dot plot for next year emphasizes the message of ‘higher for longer’ and reflects the continued caution and fear of an inflation resurgence if the Fed stops and reduces rates too soon and too quickly,” she added.
The Fed’s latest statement after the meeting on Wednesday noted that “economic activity has been expanding at a solid pace,” whereas the previous statement described it as growing at a “moderate pace.” The statement also acknowledged that job gains have slowed in recent months, compared to the strong job growth mentioned in the July policy statement. The Fed continues to emphasize its commitment to achieving its 2% inflation target.
US stocks closed lower on Wednesday, with the Dow down 0.2%, the S&P 500 losing 0.9%, and the Nasdaq Composite dropping 1.5%.
A primary objective: Achieving a soft landing
The Fed’s goal is to achieve a “soft landing” for the economy, where inflation slows down to its 2% target without a sharp increase in unemployment. However, achieving this outcome is not guaranteed, as the central bank faces uncertainties and economic headwinds in the coming months. These challenges include the resumption of student loan payments, rising energy costs impacting inflation, consumer fatigue from high inflation, and the delayed effects of previous rate hikes on the broader economy.
During a news conference after the meeting, Fed Chair Jerome Powell said that a soft landing is a plausible outcome, but there are factors outside of their control that could jeopardize it. Powell clarified that a soft landing has always been the Fed’s objective, stating, “To begin, a soft landing is a primary objective and I did not say otherwise. That’s what we’ve been trying to achieve for all this time. The worst thing we could do is to fail to restore price stability because the record is clear on that. If you don’t restore price stability, inflation comes back.” The markets reacted negatively to Powell’s remarks on the possibility of a soft landing.
Powell also discussed the economy’s growth and rising energy prices. So far, the economy has remained strong despite the Fed’s efforts to curb inflation. The robust spending in sectors like travel, concerts, and films during the summer has fueled economic growth. However, it remains to be seen if this momentum will continue. Fed officials have revised their projections for economic growth this year and next year, with the median projection for GDP growth in 2022 at 2.1%.
Powell emphasized that GDP is not the central bank’s sole focus, as their primary mandates are maximum employment and price stability. He stated that officials need to determine if the strength of GDP poses a threat to achieving 2% inflation. Economists expect slower growth this year, rather than a recession. Rising energy prices have emerged as a risk recently, with gas prices reaching their highest level since October 2022. Higher energy prices can eventually lead to increased core inflation by making services more expensive. Powell acknowledged this concern, saying, “Energy prices being higher, that is a significant thing. Energy prices being up can affect spending over time, and a sustained period of higher energy prices can affect consumers’ expectations about inflation.”
Overall, there are uncertainties and challenges ahead for the Fed as they navigate monetary policy decisions. The next meeting is scheduled for November 1, where officials will continue to assess the state of the economy.
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