The U.S. Federal Reserve voted Wednesday to pause its aggressive campaign of interest rate hikes despite "elevated" inflation, while indicating a sharp increase could be needed before the end of the year.
"It allows the economy a little more time to adapt as we make our decisions going forward," Fed chair Jerome Powell said in a press conference after the decision was announced.
After 10 straight increases, the Fed's rate-setting committee voted to hold its benchmark lending rate between 5.0% and 5.25%, the central bank said in a statement.
The widely-expected decision gives policymakers on the Federal Open Market Committee (FOMC) time "to assess additional information and its implications for monetary policy," the Fed said.
But FOMC members also hinted that more monetary tightening lies ahead, raising the median projection for interest rates at the end of this year by another half percentage point.
"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 two percent over time," Powell said.
- Higher growth ahead -
The U.S. economy has shown signs of slowing in recent months, with the Fed recently forecasting a mild recession to begin later this year.
But despite the Fed's campaign of monetary tightening, annual inflation remains "elevated" above the U.S. central bank's long-term target of two percent, while unemployment remains low, the Fed said.
Recent indicators also suggest "economic activity has continued to expand at a modest pace," it added.
The Fed also released an updated economic forecast Wednesday, lifting its 2023 GDP growth projections to 1.0% from 0.4% in March.
Median inflation expectations for the year nudged down slightly to 3.2%.
Core inflation expectations, which excludes volatile food and energy prices, rose to an annual rate of 3.9%, the Fed said.
Powell said the economy faced "potential headwinds" from tighter credit conditions in the aftermath of the collapse of a number of regional lenders earlier this year.
"It may make sense for rates to move higher, but at a more moderate pace," he said.
- Hiking in July? -
Ahead of Wednesday's decision, FOMC members were split on the best path forward with some calling for a hike and others recommending a pause.
In the end, the Fed settled on a unanimous decision to hold rates steady, while predicting a much more aggressive path ahead than many analysts anticipated.
"We expect the Fed to deliver another 25bp hike in July," Bank of America U.S. economist Michael Gapen wrote in a note to clients after the decision, adding that a further quarter percentage-point hike could be needed in September.
"We expect the Fed will raise rates two more times between now and September before fully pausing," KPMG chief economist Diane Swonk wrote in a note.
"Rate cuts are moving into late Spring 2024, barring another round of severe financial market turmoil," she added.
The Federal Reserve has already lifted its benchmark lending rate by five percentage points since it began raising rates to fight inflation in March 2022. Today it indicated it likely still has some way to go.
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