Fed maintains freeze on interest rates as it fine-tunes fight against inflation

The Federal Reserve on Wednesday kept a key interest rate at a 22-year high and left the door slightly ajar for another hike down the road if inflation doesn’t continue to slow.

The decision to hold rates steady in a range of 5.25% to 5.5% was unanimous.

The Fed is weighing how much more to raise interest rates to slow the economy and tame inflation without risking a recession.

Even though the economy expanded rapidly in the third quarter, Fed Chairman Jerome Powell said a series of interest-rate hikes since 2022 are putting downward pressure on inflation and economic growth.

Powell said he expects the economy to soften in the months ahead — though the Fed is not forecasting a recession — and help reduce inflation further. He made his remarks in a press conference after the Fed decision.

In a statement, the Fed said it would take into account a wide array of data to determine whether it would need to raise rates again “to return inflation to 2% over time.”

The current rate of inflation is 3.4% to 3.7%, depending on the measure.

A new wild card has been a surge in interest rates on longer-term bonds
whose effect has been to raise the cost of home buying and business borrowing. The Fed in its statement made a point to emphasize this tightening in “financial conditions.”

Powell said the backup in bond yields could limit further rate hikes, but only if long-term rates remained “persistently” high.

Meanwhile, the Fed acknowledged the “strong” acceleration in economic growth in the third quarter, when gross domestic product grew at a robust 4.9% annual pace.

Powell and other senior officials still expect higher rates to result in “below-trend” economic growth in the next year or so, however.

After raising interest rates steadily since March 2022, the Fed has only hiked rates by 25 basis points since June. That’s a sign officials are growing wary of overtightening unnecessarily and potentially triggering a recession.

Powell said the Fed was “proceeding carefully” and trying to do the “least damage” possible.

“This is the eye of the needle that the Fed is trying to thread: reduce consumer and aggregate demand, but not so much as to cause a recession that leads to painfully high unemployment,” said Lon Erickson, a portfolio manager at the Santa Fe, N.M.-based Thornburg Investment Management. “They need all the luck in the world.”

In their recent speeches, a growing number of Fed officials have said the focus on further rate hikes was misplaced. They instead stressed the need to maintain peak rates for longer as the best way to keep downward pressure on inflation.

Economists are divided on the outlook for the economy and interest-rate policy. Everyone agrees on the high level of uncertainty.

Some economists think the Fed will not raise rates again in the current business cycle. They see inflation continuing to fall toward the Fed’s 2% target while the unemployment rate stays relatively low.

Other economists worry there is a risk of a possible resurgence of inflation, and think the Fed would be wise to hike rates again as insurance. Still others worry the Fed will have to hike more than once to slow the economy.

The Fed has penciled in one more rate hike as likely, and thought the move would happen this year. Traders in derivative markets see a 20% chance of a move. Some see a better chance at the Fed’s January meeting. The Fed expects to lower rates by 50 basis points over next year.

The uncertainty over the outlook will be acutely felt by the Biden White House, which is watching the economy closely ahead of the presidential election one year away.

Economists think the Fed will move as needed regardless of politics.

Read next: The presidential election could hinge on Powell’s decisions

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