Fed Holds Interest Rates Steady, But Sees More Hikes This Year

The Federal Reserve voted Wednesday to hold interest rates steady, taking a widely expected break in a long succession of rapid-fire rate hikes over the last 16 months to fight inflation.

The Fed left its key interest rate at between 5% to 5.25%, its highest level in 16 years. The central bank, however, projected two more rate hikes later this year.

"Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2%," Fed Chair Jerome Powell told reporters at a press conference at the central bank's headquarters. Powell pointed to a slowing of the U.S. economy last year and recent data that points to a modest expansion. "Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace," he said.

Powell noted that growth and consumer spending have recently picked up, but the housing market remains weak. The Federal Open Market Committee, which votes on rates, didn't decide today whether it will resume its rate hikes when it next meets in July, he said.

“Speed was very important last year," Powell said. "As we get closer and closer to the destination ... it’s common sense to go a little slower."

Stocks fluctuated on the news with the Dow Jones Industrial Average falling by over 400 points shortly after the announcement, before recovering some of those losses as Powell spoke. The Dow closed down 233 points.

In releasing its decision, the Fed cited a robust job market, low unemployment and elevated inflation.

The bank said the U.S. financial system was sound, and that the tighter lending rules banks have imposed in recent months would likely be a drag on the economy, hiring and inflation. How those tougher lending standards will ultimately impact the economy can't be predicted, the Fed added, noting that it remains "highly attentive" to the risk of inflation.

"Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy," the Fed said.

Most observers anticipated the Fed’s move, particularly after Wednesday’s inflation report that showed consumer prices rose at annualized rate of 4% in May. That’s an improvement from April’s inflation rate of 4.9% and significantly below the pandemic-era peak of 9.1% in June 2022.

The central bank controls the Federal Funds Rate, which is the rate at which banks borrow from each other. Changes to the rate take months to trickle through the economy, and raising it too quickly risks decelerating too quickly and throwing the U.S. into a recession. 

With inflation slowing, some Fed officials have said they would like to wait for more data to learn how previous hikes — 10 of them since March 2022 — have affected the economy before raising rates again.

The Fed hopes that raising rates will help direct the economy to a soft landing instead of a crash. Though some indicators show the economy may be slowing enough to tamp down inflation, others remain strong. U.S. companies added 339,000 jobs in May, more than expected, although the unemployment rate ticked higher to 3.7% from April’s 3.4% rate, according to the Bureau of Labor Statistics.

The Fed’s rate indirectly drives what consumers pay for everything from credit cards to home loans, and the Fed’s latest move won’t bring relief to consumers suffering from elevated inflation.

Economists and market observers debate where the Fed’s moves will steer the economy.

Nationwide Chief Economist Kathy Bostjancic predicts a gradual improvement in inflation, no change in interest rates and more economic slowing throughout the rest of the year. “This should help lead to a moderate recession starting in Q4 and lasting into Q1 2024,” she said. “We do not look for rate cuts until 2024.”

Brett House, a professor in the economics division at Columbia Business School, says that it appears the economy may indeed achieve a soft landing, but not one without economic pain.

“A lot depends on what we mean by a soft landing,” he said. “The pain imposed by this hiking cycle is not soft for many homeowners and many workers. The notion that if we don’t slip into a recession that we’ve achieved a soft result  is not an entirely fair characterization of reality.”