The US Federal Reserve kept its target interest rate unchanged today, as expected, and signaled that most policymakers expect one more rate hike may be required this year to tame inflation.
The Fed's Federal Open Market Committee (FOMC) held the federal funds target rate unchanged at 5.25-5.5pc, the highest in 22 years. Policymakers hiked a quarter point at their 26 July meeting, the 11th increase since March 2022, as the Fed has been battling to rein in inflation that surged to a four-decade high of 9.1pc in June last year.
"We will continue to make our decisions meeting by meeting," depending on incoming data and financial conditions, Fed chief Jerome Powell told journalists after the meeting. "We are prepared to raise rates further, if appropriate."
Still, he added, "We have the ability to be careful at this point, to move carefully," thanks to slowing inflation.
Economic projections released by the FOMC suggests most members expected one more rate hike this year, unchanged from projections released in June. The median projections are for the fed funds rate to fall to 5.1pc next year, suggesting two rate cuts next year, compared with a prior forecast of 4.6pc for 2024. The median projection is for unemployment to rise to 4.1pc by the end of next year, compared with a prior forecast of 4.5pc.
The CME's FedWatch tool, which tracks fed funds futures trading, had assigned a 99pc probability to the Fed holding rates steady today while predicting more than one rate cut in the second half of 2024.
The Fed has been engaged in its most aggressive course of monetary tightening since the 1980s as it seeks to constrain demand and hiring to bring inflation down to its 2pc target while avoiding a recession — a tough prospect. Higher borrowing costs weigh on demand for big-ticket items such as automobiles, houses and machinery to expand businesses.
The Fed decision comes amid an uptick in inflation, largely prompted by higher energy costs, as the consumer price index rose at a 3.7pc annual rate in August, accelerating from a 3.2pc rate the prior month, while prices paid to producers rose by an annual 1.6pc pace, up from 0.8pc in the prior month. Still, inflation has fallen sharply since the middle of 2022.
While the Fed has been laboring to rein in demand and hiring to slow the US economy and inflation, hiring has only recently begun to slow dramatically, while the overall economy averaged annual growth of 2.05pc in the first half, suggesting resilience to the higher lending rates and inflationary pressures.
