Holding rates steady will allow Fed to assess information as it seeks to balance risk to economy and high inflation.

In an effort to balance risks to the economy with a still unresolved fight to control inflation, “holding the target [interest rate] range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the rate-setting Federal Open Market Committee said in a unanimous policy statement issued at the end of its latest two-day meeting.

Further rate increases would “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”, it said.

The new projections, adding a hawkish tilt to Wednesday’s interest rate decision, showed that the policymakers at the median saw the benchmark overnight interest rate rising from the current 5 percent to 5.25 percent range to a 5.5 percent to 5.75 percent range by the end of the year. Half of the 18 Fed officials pencilled in their “dot” at that level, with three seeing the policy rate moving even higher – including one official who saw it rising above 6 percent.

Two Fed officials saw rates staying where they steady, and four saw a single additional quarter-percentage-point increase as likely appropriate.

Policymakers, however, see 100 basis points of rate cuts in 2024, alongside fast-falling inflation.

Combined, the rate outlook and the projections are likely to lead investors to expect a resumption of quarter-percentage-point rate increases beginning at the next policy meeting in July.

Improved economic view

The higher rate outlook coincided with an improved view of the economy and, consequently, slower progress in returning inflation to the central bank’s 2 percent target.

Fed officials at the median more than doubled their outlook for 2023 economic growth to 1 percent, from 0.4 percent in the March projections, and saw the unemployment rate rising only to 4.1 percent by the end of the year compared to 4.5 percent in the March outlook.

The jobless rate as of May was 3.7 percent.

The stronger-than-expected economy means inflation will fall more slowly, with the core Personal Consumption Expenditures Price Index dropping from the current 4.7 percent to 3.9 percent by year’s end, compared to a 3.6 percent year-end rate seen in the March policymaker projections.

The decision snapped a string of 10 consecutive rate hikes delivered as the Fed responded to the worst outbreak of inflation in 40 years with a matching set of aggressive policy moves, including four outsized increases of three-quarters of a percentage point last year.

The central bank’s policy rate, which influences household and business borrowing costs throughout the economy, rose a full 5 percentage points from the onset of the tightening cycle in March 2022, reaching the highest level since just before the start of the 2007-2009 recession.