Source: cnbc.com

The Federal Reserve on Wednesday decided against what would have been an 11th consecutive interest rate increase as it measures what the impacts have been from the previous 10. But this decision came with a projection that another two quarter percentage point moves are on the way before the end of the year.

“We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace,” said Fed Chair Jerome Powell. The possibility of further rate increases put pressure on stocks immediately, but encouraging talk on the fight against inflation allowed the market to rebound briefly. “We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”

A ‘hawkish pause’

The central bankers said they will take another six weeks to see the impacts of policy moves as the Fed fights an inflation battle that lately has shown some promising if uneven signs. The decision left the Fed’s key borrowing rate in a target range of 5%-5.25%.

The members of the FOMC indicate their expectations for rates further out, the median expectation to a funds rate of 5.6% by the end of 2023. Assuming the committee moves in quarter-point increments, that would imply two more hikes over the remaining of this year. Powell said the FOMC hadn’t yet made a decision about whether another increase, while Bank of America said that it expects the Fed to move in July and September.

Opinions vary on future hikes

FOMC members approved Wednesday’s move unanimously, though there remained considerable disagreement among members. Two members indicated they don’t see hikes this year while four saw one increase and nine, or half the committee, expect two. Two more members added a third hike while one saw four more, again assuming quarter-point moves.

Members also moved up their forecasts for future years, now anticipating a fed funds rate of 4.6% in 2024 and 3.4% in 2025. That’s up from respective forecasts of 4.3% and 3.1% in March. The future-year readings, though, do imply the Fed will start cutting rates – by a full percentage point in 2024, if this year’s outlook holds. The long-run expectation for the fed funds rate held at 2.5%.

Those changes to the rate outlook occurred as members raised their expectations for economic growth for 2023, now anticipating a 1% gain in GDP as compared to the 0.4% estimate in March. Officials also were more optimistic about unemployment this year, now seeing a 4.1% rate by year’s end compared with 4.5% in March’s prediction. On inflation, they raised their collective projection to 3.9% for core (excluding food and energy) and lowered it slightly to 3.2% for headline. Those numbers had been 3.6% and 3.3% respectively for the personal consumption expenditures price index, the central bank’s preferred inflation gauge. The outlooks for subsequent years in GDP, unemployment and inflation were little changed.