Fed leaves interest rates steady, signals one more hike ahead

The Federal Reserve elected to leave interest rates unchanged Wednesday, and issued new projections indicating most officials anticipate one more interest rate hike this year.

Why it matters: The central bank's 18-month campaign to slow inflation sent convulsions through financial markets and put economists on high alert for a recession. That campaign now appears to be coming to a close, though rate cuts appear far off.

Details: The Fed's policy-setting Federal Open Market Committee elected to leave the federal funds rate unchanged at a range of 5.25% to 5.5%, while mostly repeating language from previous statements describing the rationale for the move.

• Notably, in projections released alongside the statement, 12 of 19 top policymakers expected one more interest rate increase this year to be justified.
• Some commentators have argued that the central bank is done with rate hikes already, but this is not the majority view among the officials.
• However, the officials' expectation for interest rates at the end of 2024 was marked up, to 5.1% from 4.6% in June. Leaders of the central bank now expect to cut interest rates by less next year than they did three months ago.

What he's saying: Fed chair Jerome Powell continued to stress that policy makers want to see further improvements in inflation.

• "We want to see that these good inflation readings that we've been seeing for the last three months, we want to see that it's more than just three months," he said at a press conference Wednesday afternoon.
• "Given how far we've come and how quickly we've come, we're actually in a position to be able to proceed carefully as we assess the incoming data, and the evolving outlooks and risks, and make [interest rate] decisions meeting by meeting," he added.

Between the lines: Fed officials are embracing a higher-for-longer strategy in which they only push interest rates slightly higher than they are now, but then hold those rates at elevated levels through most of next year.

• The goal is to slow activity and keep inflation moving downward.

"Economic activity has been stronger than we expected, stronger than I think everyone expected," Powell said.

The median official raised their projections for 2023 GDP growth, to 2.1% from 1% in June, reflecting strikingly strong growth this summer.

• The median also saw the unemployment rate rising only to 3.8% this year, not the 4.1% envisioned in June, reflecting a resilient labor market.
• "Job gains have slowed in recent months but remain strong," the committee's statement said.
• Fed officials expect inflation for the full year to be 3.3% this year and 2.5% next.

Of note: More top Fed policymakers now believe that the longer-term interest rate has risen, implying that rates will stay elevated well above the ultra-low levels of the recent past.

• Five top officials now believe that the longer-term rate is 3% or higher. Three held that view in June and zero did last year.
• The median estimate of longer-term interest rates was unchanged at 2.5%, however.

Editor's note: This story has been updated to include comments from Fed chair Jerome Powell's press conference.