Federal Reserve keeps interest rates steady, plans two more rate hikes this year

The Federal Reserve kept interest rates steady on Wednesday, but officials signaled they were prepared to raise rates again this year to tame persistent inflation.

The central bank kept its benchmark interest rate in the 5% to 5.25% range, the first time since January 2022 that the Fed made no changes to interest rates following a political meeting.

Fed officials, however, raised their interest rate forecast for this year, signaling that rates could reach 5.6%, implying that two more rate hikes are likely this year. Three officials see rates rising closer to 6%.

Next year, officials expect interest rates to fall by 100 basis points to around 4.6%, higher than the 4.3% forecast in March.

In its statement, the Fed said:[Holding] the stable target range at this meeting allows the committee to assess additional information and its implications for monetary policy.”

However, the officials retained language in the statement which read: “In determining the extent to which further policy tightening may be appropriate…the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” leaving the central bank open to raising rates again this year.

The Fed raised rates in 10 straight policy meetings through May, taking its target range from 0%-0.25% to 5%-5.25%, the highest since 2007, in just 14 months. Wednesday’s decision to hold rates steady was unanimous.

Since peaking at 9.1% in June 2022, inflation has come down, with headline inflation rising just 4.1% in May according to data released on Tuesday. On a “basic” basis – which excludes volatility in food and energy prices – inflation hit 5.3% in May. This compares to the 5.5% seen in April.

Both readings are still well above the Fed’s 2% target.

Alongside its policy decision on Wednesday, the Fed released an updated Summary of Economic Projections (SEP), which outlines officials’ expectations for growth, inflation, rates and the labor market for the remainder of this year. year and the next two.

Fed officials see inflation ending the year near 4% now, down from 3.6% previously. Unemployment is only climbing to 4.1% from 4.5% previously. Officials now see stronger economic growth this year of 1% from 0.4% previously.

Officials again noted that the tightening of credit conditions for households and businesses is likely to weigh on the economy, hiring and inflation and that the degree of impact is uncertain.

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