Topline
The Federal Reserve decided to keep interest rates the same for just the second time since beginning its current hiking cycle aimed at curbing inflation last year, but projected that rates will remain higher over the next two years than previously expected, providing some unwelcome news for investors hoping for rates to come down sooner rather than later.
Key Facts
The Fed will hold rates steady at the 22-year high of 5.25% to 5.5% as widely expected, the central bank announced Wednesday afternoon following the conclusion of the two-day meeting of its policy-setting Federal Open Markets Committee.
But perhaps more crucially, the Fed’s quarterly economic forecast Wednesday revealed policymakers expect interest rates to remain higher for longer.
Fed officials expect rates to sit at a median of 5.6% by year’s end, the same as its projection of 5.6% in June’s forecast, 5.1% by the end of 2024 versus 4.6% in June and 3.9% by the end of 2025 from 3.1% in June, maintaining its 2.5% long-term estimate.
The statement accompanying the release noted the Fed is “prepared to adjust the stance of monetary policy,” though the projections imply there will be one final 25 basis-point hike this year.
Fed staff increased their median projections for gross domestic product growth as well and decreased their outlook for the unemployment rate, indicating the central bank has higher confidence in the economy.
Stocks slipped following the Fed report, paring earlier gains and sending the S&P 500 to a modest decline for the day.
What To Watch For
The Fed’s 2024 federal funds rate projection is perhaps the “most important forecast” for investors, a Bank of America group led by economist Michael Gapen wrote Monday, predicting the Fed to up its 2024 estimate to 4.875%. Prior to the Fed’s Wednesday release, the futures market priced in a federal funds rate of 4.5% to 4.75% as the most likely scenario for the end of 2024, according to CME Group data. The next rate cut will be the first since March 2020.
Crucial Quote
The economic projections released Wednesday indicate “the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer,” Vanguard economist Andrew Patterson wrote in emailed comments.
Key Background
Since last March, Fed chairman Jerome Powell and company hiked the federal funds rate 11 times in an effort to stem inflation by slowing the economy, bringing it up from the near-zero levels they hovered at beginning in early 2020. The federal funds rate only technically determines the interest rate at which banks can lend to each other but heavily influences the borrowing costs across the economy, such as mortgages, car loans and business loans. The rise in rates came as the Fed sought to tackle soaring inflation. The consumer price index peaked at 9.1% last June but came in at a far more modest 3.7% last month, still well above the Fed’s 2% long-term target, as the central bank’s battle on inflation bears fruit but remains far from over. The higher-rate environment has stifled stocks as it cuts into corporate bottom lines as borrowing costs mount; the S&P 500 is down about 7% since the end of 2021 when rates were 0% to 0.25%.
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