Federal Reserve signals fresh rate rise this year and fewer cuts in 2024

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Federal Reserve officials on Wednesday signalled support for another rate rise this year and fewer cuts in 2024 even as the US central bank held its benchmark interest rate steady at a 22-year high.

The Federal Open Market Committee opted against an interest rate increase following its latest two-day meeting and voted unanimously to hold the federal funds rate between 5.25 per cent and 5.5 per cent. That was in keeping with the bank’s strategy of moving more carefully in the latter stages of its fight against inflation.

Since March 2022, the Fed has pursued one of the most aggressive campaigns to choke off consumer and business demand in decades in a battle against price pressures that have proven far more persistent than expected.

In a statement, the committee said it remained “highly attentive to inflation risks”, noting economic activity had been expanding at a “solid pace” and jobs gains, while slower, were “strong”.

The Fed on Wednesday also released a new set of individual economic projections from its policymakers, which forecast stronger growth this year and a more benign inflation outlook compared with previous estimates released in June.

The projections, known as the dot plot, also signalled support for the funds rate to peak between 5.5 per cent and 5.75 per cent — translating to one more quarter-point rate rise this year — while pencilling in fewer interest rate cuts for 2024 and 2025.

The two-year Treasury yield, which moves with monetary policy expectations, rose to its highest level since 2006 following the Fed statement, as investors priced in the prospect of an additional interest rate rise this year. In the futures market, traders were evenly divided on the chances that the central bank would raise interest rates again by the end of 2023.

In a press conference following the statement, Fed chair Jay Powell said the decision to hold rates steady did not mean policymakers had concluded monetary policy was sufficiently restrictive to bring inflation under control.

Pointing to the new projections, he added: “You will see that a majority of participants believe that it is more likely than not that . . . it will be appropriate for us to raise rates one more time in the two remaining meetings this year.”

Powell said that while a soft landing for the US economy was not yet his baseline view, there was still a path to bring inflation down without excessive job losses.

“It’s a good thing that the economy has been able to hold up under the tightening that we’ve done . . . if the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2 per cent.”

Michael de Pass, head of rates trading at Citadel Securities, said Powell had been “more hawkish than what the market was expecting”.

He added: “The main takeaway is that the Fed doesn’t want to declare victory over inflation yet.”

Most policymakers now project the fed funds rate will hover between 5 per cent to 5.25 per cent by the end of 2024, up from 4.6 per cent in June. They expect fewer cuts in 2025, with the median estimate for the benchmark rate revised up to 3.9 per cent from 3.4 per cent. Policymakers also submitted their first forecasts for 2026, predicting a year-end policy rate of between 2.75 per cent to 3 per cent.

The median estimate of the “neutral” rate, reflecting the level whereby growth is neither buoyed nor depressed, was unchanged at 2.5 per cent, although several officials pencilled in a higher level.

Officials’ median estimate for gross domestic product growth by year-end increased significantly to 2.1 per cent from 1 per cent and was again revised higher by 0.4 percentage points for 2024 to 1.5 per cent.

They also lowered their forecasts for core inflation to 3.7 per cent for 2023, having previously predicted 3.9 per cent. For 2024 they left their forecasts unchanged at 2.6 per cent, while forecasting that inflation would only revert to the Fed’s 2 per cent target by 2026.

The unemployment rate is now projected to reach 4.1 per cent by 2024, a lower peak compared to June.

But it is far from guaranteed that the Fed will follow through with further tightening, given the risks some officials see facing the US economy.

Officials are also aware that the impact of months of higher interest rates may only be becoming evident now, such as in the cooling of the US labour market.

Fresh challenges to growth have also emerged, including the resumption of student loan repayments, an unresolved autoworker strike and a looming government shutdown. A surge in oil prices stemming from recent supply cuts has also caused concern, amid fears it could lift the costs of goods and services.

A recent Financial Times poll of leading academic economists showed most thought the central bank had more work to do to beat back inflation. But other analysts are less sure.

“We think the Fed has finished hiking,” said Sophia Drossos, an economist at Point72 Asset Management. “We think there is enough downside to inflation and a speed bump to growth coming in Q4 that could put the Fed on pause.”