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In a widely anticipated move, the Fed chose to keep interest rates steady on Wednesday, holding them at 5.25%–5.50%. It revised its economic projections in a more optimistic direction, but left the door open for another rate hike before year’s end.
The Fed projects that the federal funds rate will reach 5.6% by the end of 2023, Chair Jerome Powell said in his opening statement. That indicates the agency could raise rates again during its October–November or December meetings. The Fed is “prepared to raise rates further if appropriate,” Powell said in his statement.
Interest rates likely won’t reach pandemic-era lows any time soon. According to the Fed’s latest Summary of Economic Projections (SEP), the benchmark rate is projected to fall to 5.1% by the end of 2024 and 3.9% by the end of 2025. Inflation won’t moderate to the Fed’s goal of 2% until 2026, the SEP forecasts.
But there are signs the Fed is feeling more confident about the state of the economy. The labor market is still strong and unemployment is low, Powell said in his statement, which is buoying consumer spending. In the SEP, the Fed raised its projection for this year’s GDP growth to 2.1%, up from the 1.0% it projected in June. It now foresees 1.5% GDP growth in 2024, up from the 1.1% it predicted in June, Reuters reported.
“They’re worried about taking a victory lap too early, obviously, but these forecasts are soft landing-adjacent,” Goldman Sachs Chief Economist Jan Hatzius told the Wall Street Journal.