By Yasin Ebrahim
Investing.com -- The Federal Reserve kept rates steady on Wednesday, but continued to signal for one more rate hike this year and fewer rate cuts next year even as Fed members projected a faster easing in the pace of inflation.
Fed holds rates steady, but rate hike #12 remains in play for 2023
The Federal Open Market Committee, the FOMC, kept its benchmark rate in a range of 5.25% to 5.5%. The Fed’s decision to hold rates steady followed recent evidence that its 11 rate-hikes delivered so far are starting to turn the tide in the battle against inflation.
The core personal consumption expenditures price index, or core PCE, which is closely watched by the Fed as a more accurate measure of underlying price pressures, slowed to 4.3% from 4.7% in the 12 months ending in August. That was the slowest pace since September 2021.
Still, a twelfth rate hike remains on the table as FOMC maintained their forecast for rates to peak at 5.5% to 5.75% this year, or 5.6% at the midpoint, according the Summary of Economic projections that accompanied the monetary policy statement.
Fed commits to higher for longer rate regime with fewer cuts expected in 2024
In a sign that the Fed is committed to its higher-for-longer rate regime, Fed members now see the benchmark rate at 5.1% next year, suggesting just two rate cuts in 2024, compared with four rate cuts projected previously.
For 2025, interest rates are expected to drop to 3.9%, but that well above the 3.4% previously projected, and fall further to 2.9% in 2026.
No rush to declare victory on inflation just yet
But with inflation still running above the Fed’s 2% target, and ongoing strength in the economy that threatens to rejuvenate inflation, committee members endorsed recent positive inflation data, but aren’t in a rush to declare victory on inflation just yet.
The Fed now expects the core PCE index to average 3.7% this year, down from a prior forecast of 3.9% seen in June. For 2024, inflation is estimated to slow to 2.6%, unchanged from the prior forecast, and fall further to 2.3% by 2025, slighter higher than the prior projections of 2.2%, before eventually slipping to the 2% target in 2026.
Tight labor market to unwind slower than previously expected
The tight labor market, which has proved to be fertile ground for sticky inflation as wage growth underpins the bulk of price pressures in the service sector, continues to worry to Fed members.
Fed members now appear less confident that the tight labor will ease sooner than rather later.
The unemployment rate is expected to be 3.8% in 2023, down from a prior estimate of 4.1%, but rise to 4.1% next year and remain at that rate for 2025, down from the June forecast of 4.5%, according to the Fed's projections. For 2026, the unemployment rate is expected to fall to 4.0%.
Fed upgrades growth forecast to keep soft landing in sight
The strength in the economy, which has surprised many, has also caught the attention of Fed members forcing them to upgrade the economic outlook ahead.
Economic growth this year was raised markedly to 2.1% more than double the 1% rate that was projection at the June meeting, while the growth forecast for 2024 was raised to 1.5% from 1.1% previously.
The prospect of stronger growth, however, has some concerned that inflation could likely tag along for the ride, forcing the Fed into a more hawkish path next year.
"I think the risk would be in the first quarter that they do a an additional hike if in fact inflation picks back up," Chief Strategist Rhys Williams of Spouting Rock Asset Management told Investing.com's Yasin Ebrahim in an interview on Tuesday.