Updated at 2:23 pm EDT
The Federal Reserve kept its benchmark lending rate unchanged at a two-decade high, but suggested at least one more increase is likely between now and the end of the year as inflation remains elevated and the economy continues to perform.
The Fed’s Open Markets Committee held its key policy rate at between 5.25% and 5.5%, the highest in 22 years, in a move that was widely expected from markets following a quarter point rate hike in July.
The Fed’s new Summary of Economic projections, known as the dot plots, now calls for GDP stronger growth of 2.1% this year, more than double its prior forecast, with the forecast for unemployment coming down to 3.9% from a prior estimate of 4.1%.
In terms of inflation, the Fed’s dot plots suggests rate-setters are seeing core personal consumption expenditures inflation, the bank’s preferred measure, easing to 3.7% this year from its prior estimate of 3.9%.
The dots also suggest that 12 members of the FOMC see at least one more rate cut, with 7 indicating the need for a pause in order to determine the impact of past hikes on the economy.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will 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,” the Fed said in a statement released alongside the interest rate decision.
“In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans,” the statement added. “The Committee is strongly committed to returning inflation to its 2% objective.”
For 2024, the Fed sees only 50 basis points, or half a percentage point, in potential rate cuts, down from the full percent indicated in the June projections.
The decrease in the number of cuts in 2024 is one of the more telling changes this month. It means (combined with the increase in growth expectations and cut in unemployment rate for that year) that the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer,” said Andrew Patterson, senior economist at Vanguard.
U.S. stocks pared earlier gains immediately following the Fed decision, with the S&P 500 marked 4 points lower, or 0.1%, lower on the session while the Dow Jones Industrial Average was up 135 points. The tech-focused Nasdaq was marked 55 points lower.
Benchmark 10-year Treasury note yields were marked 4 basis points higher at 4.353% while 2-year notes jumped 7 basis points to 5.127%.
The U.S. dollar index, meanwhile, was marked 0.13% lower at 105.006 against a basket of six global currency peers.
CME Group’s FedWatch now suggests a 36.3% chance that the Fed will lift rate by 25 basis points (0.25 percentage point), to between 5.5% to 5.75% at its next policy meeting in November, with the odds for a December hike pegged at 40.4%.
Get exclusive access to portfolio managers and their proven investing strategies with Real Money Pro. Get started now.
