The Federal Reserve announced on Wednesday that it would maintain the current interest rates, but suggested there might be one more increase before 2023 wraps up. The central bank’s projections suggest that this potential increase could conclude the current cycle, capping off 12 hikes since the inception of policy adjustments in March 2022.
The ongoing meeting left the fed funds rate within the 5.25%-5.5% bracket, marking a 22-year peak. This rate not only influences interbank overnight lending but also impacts a plethora of consumer debts.
Though the market anticipated this stabilization in rates, the future strategies of the Federal Open Market Committee remained a topic of debate. However, the recent documentation suggests a preference towards a stringent policy with prolonged elevated rates.
According to the latest "dot-plot" from the Fed, there's a possibility of one more rate hike this year followed by two reductions in 2024 — a decrement from the four projected in June, which would set the funds rate at approximately 5.1%. These plots enable committee members to anonymously predict rate trajectories.
At the committee meeting, out of the total members, 12 favored another hike and seven opposed it. Notably, recently appointed Fed Governor Adriana Kugler did not participate in the last vote. The median forecast for the 2025 fed funds rate has risen to 3.9%, an uptick from its prior 3.4%.
Looking further ahead, the FOMC predicts a 2.9% funds rate in 2026, which surpasses the "neutral" rate which neither boosts nor hampers growth. This was the committee's inaugural projection for 2026, with the enduring neutral rate stabilized at 2.5%.
Economic growth projections for 2023 have been revised upwards significantly to 2.1%, more than double the June estimate, reflecting confidence against an impending recession. The GDP projection for 2024 is adjusted to 1.5% from its earlier 1.1%.
The anticipated inflation rate reduced slightly to 3.7%, a 0.2% drop since June, with the unemployment forecast now at 3.8%, down from 4.1%.
Post-meeting statements displayed minor changes that echo this revised economic forecast, highlighting a strengthening economy and steady job gains.
Alongside the interest rate decisions, the Fed continues its contraction of bond holdings, reducing its balance sheet by approximately $815 billion since June 2022.
Despite these tactical moves, the Federal Reserve treads carefully, especially as there are indications of a shift in their stance on managing inflation. The challenges faced by the bank are reminiscent of the stringent policies of the early 1980s.
While employment remains robust with a 3.8% unemployment rate, the inflation rate persists above the Fed’s 2% objective, especially with core inflation recorded at 4.2% in July.
Consumer spending stays buoyant despite growing credit card debts exceeding $1 trillion. Recent surveys, however, underline growing public concern regarding the economy, with a 69% dissatisfaction rate in a recent CNBC All-American Survey – a 17-year peak.