On Wednesday, September 20, 2023 the Federal Reserve opted to maintain its benchmark interest rates at a 22-year high, currently ranging between 5.25% and 5.5%. While the Fed decision on rate hike is that rates remained unchanged for now, the central bank indicated the necessity for another rate hike later this year to combat persistently high inflation and steer it back towards the target of 2%. Here are the key takeaways from the meeting:
Interest Rates Remain Steady, Outlook Divided
The Fed’s decision to keep its benchmark interest rates steady came as no surprise, as the central bank had indicated its intention to await additional data to gauge the impact of the previous 11 rate hikes on the U.S. economy. This move follows two instances of maintaining steady rates, with the most recent pause occurring in September 2023.
The Federal Open Market Committee (FOMC) was, however, divided in its outlook. Twelve of its members advocated for a rate hike later this year, while seven members favored maintaining rates at their present levels through year-end.
Projections: Lower Interest Rates, Higher GDP Growth
The Fed’s latest set of economic projections revealed the following:
- Decrease in Interest Rates: The Fed anticipates a 0.5% reduction in interest rates next year, from an expected peak range of 5.5% to 5.75%. This implies a more extended period of elevated rates than initially projected earlier this year when officials had indicated a full percentage point worth of rate cuts for 2024. The Fed also highlighted in its statement that future rate adjustments would depend on the cumulative impact of past rate hikes on the economy.
- Lowered Inflation Projections: The Fed has lowered its inflation projections, despite acknowledging the persistently high state of inflation. It now foresees year-end inflation settling at 3.7%, down from the 3.9% forecast in June. The central bank also expects inflation to moderate to 2.6% next year, aligning with its forecasts from June.
- Job Growth Slowdown: The Fed has also noted a slowdown in job growth, revising its unemployment forecast for this year down to 3.8%, from the previous estimate of 4.1%. It expects this level to persist through 2025.
- GDP Growth Upward Revision: The outlook for GDP growth has seen an upward revision for the current year, now projected at 2.1%, up from the previous estimate of 1%. Next year’s GDP outlook has similarly been raised to 1.5% from 1.1%.
As the Fed contemplates future actions, it does so with caution, taking into account cooling inflation trends and the delicate balance between mitigating inflation risks and avoiding excessive economic dampening.
However, in a unanimous decision, the Federal Reserve has signaled its commitment to maintaining economic stability while addressing inflationary concerns, setting the stage for careful deliberation in the months to come.