The Federal Reserve kept its key interest rate on hold on Wednesday, halting what has been the most aggressive push to suppress inflation since the 1980s.
The Fed’s benchmark interest rate remains in a range between 5% and 5.25%. This rate determines what banks pay to borrow money and influences borrowing costs for consumers and businesses.
“Given how far we have come in policy tightening, the uncertain lags with which monetary policy affects the economy, and the potential headwinds of credit tightening, today we decided to leave our political interest unchanged,” Federal Reserve Chairman Jerome Powell said. he told reporters on Wednesday.
“It may make sense for rates to go higher, but at a more moderate pace,” he added.
The shutdown points to a new phase in policymakers’ war on inflation. The central bank has raised rates 10 times since March 2022 to cool the highest inflation in four decades. Those hikes have pushed the annual inflation rate from a peak of 9% in June 2022 to 4% last month, but inflation remains above the 2% target stated by the Fed.
Both worker advocates and investors have urged the Fed to hold off on rate hikes to prevent the economy from slipping into recession.
Due to sharp increases in interest rates over the past 15 months, a mortgage costs twice what it did in 2021, auto loans are at a 15-year high, and the job market is slowing. Since it can take some time for the full effect of rate hikes to be felt, the Fed’s pause will give policymakers more time to assess whether they should raise rates further or hold off.
The Fed’s forward-looking projections today are much brighter than in March, with policymakers expecting the economy to grow by 1% this year and the unemployment rate to rise slightly to 4.1% .
The Fed also signaled that more rate hikes were likely, with policymakers predicting a final rate of around 5.6%, signaling two more hikes before the end of 2023.
“The Fed is basically acknowledging that growth this year is holding up much better than expected, but it also expects core inflation to remain higher than expected,” analysts at Vital Knowledge said in a note note
Stocks fell after the announcement as Wall Street digested the forecast that more rate hikes are likely later this year. The Dow Jones Industrial Average fell 1% to 33,876 in the afternoon, while the S&P 500 and the tech-heavy Nasdaq also lost ground.
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