US Fed Reserve holds rates, signals one more hike

Stronger US economic growth may keep rates higher for longer after the Federal Reserve’s call to hold steady, signal one more hike by December.

US Federal Reserve officials voted to hold interest rates steady at a 22-year high and signalled they were prepared to raise rates once more this year to combat inflation.

With economic activity stronger than anticipated, most officials also expected they would need to keep interest rates near their current level through next year, according to projections released overnight at the conclusion of their two-day policy meeting.

Fed Chair Jerome Powell said that officials didn’t need to decide yet over whether to raise rates again this year.

“What people are saying is, ‘Let’s see how the data come in,’” he said at a news conference Wednesday. While inflation has declined recently, “we want to see that it’s more than just three months.”

Powell also said the speed with which the Fed raised rates last year meant “we do have the ability to be careful as we move forward”.

“If economy comes in stronger than expected it means we will have to do more to bring down inflation.”

Fed officials raised their benchmark federal-funds rate at their previous meeting in July to a range between 5.25 per cent and 5.5 per cent. They began lifting rates from near zero in March 2022.

The latest decision marks the second meeting this year at which the Fed opted against raising rates. It also paused in June. Because it can take a year or longer for rate increases to slow economic activity, officials have said a slower pace of hikes would allow more time to see how the economy is responding to them.

Powell last month signalled he was reluctant to declare victory too soon in the Fed’s inflation fight.

And signs of stronger-than-anticipated economic activity “could put further progress on inflation at risk.” The new economic projections showed 12 of the 19 officials expect to raise rates once more this year, the same as they saw in June. They meet again on October 31-November 1 and in December.

The median projection showed officials expect to lower the fed-funds rate to around 5 per cent by the end of 2024, implying two rate cuts next year if they hike again this year.

US shares ended in the red following the central bank’s commentary. Picture: Michael M Santiago/AFP

Officials projected stronger economic growth for this year and next, and they now expect a smaller rise in unemployment compared with their June projections. Most officials see the unemployment rate, at 3.8 per cent in August, rising to 4.1 per cent next year, a lower level than they projected in June.

Their projection for annual core inflation, which excludes volatile food and energy prices, edged down to 3.7 per cent for the fourth quarter, compared with their June projection of 3.9 per cent.

Since officials’ July meeting, inflation has shown more evidence of a broadbased decline. Wall Street forecasters estimate that core prices rose at a mild pace for a third straight month in August, as measured by the Fed’s preferred gauge.

Powell said Fed economists expect that could lower the 12-month core inflation rate to 3.9 per cent in August, down from 4.5 per cent when Fed officials last submitted projections in June. The Fed targets 2 per cent inflation on average.

Labour markets, meanwhile, have shown signs of loosening somewhat. The unemployment rate ticked up to 3.8 per cent last month, from 3.5 per cent in July, as more Americans sought work. The share of workers who are quitting their jobs – often a sign of bargaining power as employees leave for higher pay elsewhere – eased in July and is returning to pre-pandemic levels.

Still, several Fed officials have been reluctant to call an end to rate rises.

Solid economic growth has defied economists’ expectations that it would sag this year. Some officials worry that firmer economic activity and rising prices for oil and freight transportation could lead recent declines in inflation to stall or even reverse, requiring higher rates.

They fear ending hikes only to discover in coming months that they didn’t go far enough. It could be particularly disruptive if financial markets conclude inflation and interest rates had flattened out only to learn the opposite.

Signs that the economy isn’t slowing down has pushed up yields on the 10-year Treasury note. The 10-year yield has climbed above 4.3 per cent, near the highest level since 2007, and up from 3.9 per cent when Fed officials met in July. Those market-determined rates influence an array of borrowing costs, including mortgage rates, which recently hit a 22-year high.

The increases, in effect, do much of the work that a Fed rate increase would be intended to achieve by further reducing demand for rate-sensitive purchases such as houses and cars.

– The Wall Street Journal