Fed pauses interest rate hikes but signals more tightening ahead

AFP , Wednesday 14 Jun 2023

The US 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.

US Federal Reserve
File photo: The Federal Reserve Building on Constitution Avenue in Washington is seen Aug. 2, 2017, in Washington. AP

After 10 straight increases, the Fed's rate-setting committee voted to hold its benchmark lending rate between 5.0 percent and 5.25 percent, the central bank said in a statement.
Holding interest rates steady gives policymakers on the Federal Open Market Committee (FOMC) time "to assess additional information and its implications for monetary policy," the Fed said.
It added that doing so allows policymakers "to assess additional information and its implications for monetary policy."
The move was broadly in line with analysts' expectations.
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.
This suggests the Fed may need to hike rates twice more before the year is out.
Fed not done yet
The US economy has shown signs of slowing, 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 US central bank's long-term target of two percent, the Fed said, while unemployment remains low.
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 percent from 0.4 percent in March.
Median inflation expectations for the year nudged down slightly to 3.2 percent.
Core inflation, which excludes volatile food and energy prices, rose to an annual rate of 3.9 percent, the Fed said.
Divisions remain
Ahead of Wednesday's decision, FOMC members were split on the best path forward.
"Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming," Fed governor Philip Jefferson said late last month.
Jefferson, who was recently nominated for the vacant number two spot at the Fed, added that such a move "should not be interpreted to mean that we have reached the peak rate for this cycle."
But other FOMC members said more needed to be done to tackle inflation.
"We should not be fooled by a few months of positive data," Minneapolis Federal Reserve president Neel Kashkari said last month.
"We still are well in excess of our two percent inflation target, and we need to finish the job," he added.
The US Fed has lifted its benchmark lending rate by five percentage points since it began raising rates to fight inflation in March 2022.
Today it indicated it must go further still to bring inflation down for good.
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