The Federal Reserve has chosen to maintain its current interest rates at 5.25%-5.50% while adopting a more hawkish monetary policy stance, with a focus on tackling inflation without causing significant harm to the economy.
The Federal Reserve has decided to maintain its current interest rates while adopting a tougher stance on monetary policy.
This pivot toward a more hawkish approach reflects the central bank’s determination to address stubborn inflation without causing substantial harm to the economy or triggering substantial job losses.
A Hawkish Turn in Monetary Policy
The Federal Reserve’s decision has emphasized its commitment to combat inflation, a sentiment echoed by Fed Chair Jerome Powell during a press conference following the two-day policy meeting. Powell emphasized the public’s aversion to inflation, stating, “People hate inflation. Hate it.”
While the Fed held its benchmark overnight interest rate within the 5.25%-5.50% range, it outlined a more stringent policy path to tackle inflation that is expected to persist until 2026. This path may involve lifting the benchmark rate one more time this year, potentially reaching a range of 5.50%-5.75%, according to the updated quarterly projections released by the central bank.
Balancing Inflation Control and Economic Stability
Powell acknowledged that the rapid rate hikes implemented over the past 18 months had brought the Fed closer to its desired stance of monetary policy. He pointed out that the US economy remains “solid” with “strong” job growth.
The central bank believes that maintaining pressure on financial conditions through 2025 is essential to control inflation. However, this approach is expected to come at a lesser cost to the economy and labor market than seen in previous inflation battles.
While inflation has moderated from its peak, it still hovers significantly above the Fed’s 2% target. In August, the annual inflation rate reached 3.7%, with core inflation (excluding food and energy prices) at 4.3%. The Fed reiterated its strong commitment to returning inflation to the 2% target.
A Longer Period of Restrictive Monetary Policy
The Fed’s updated projections suggest that interest rates are likely to remain higher for a more extended period than previously expected. While the central bank anticipates a decline in inflation for the rest of 2023 and the coming years, it foresees only modest initial reductions to its policy rate. This implies that the expected half-percentage-point rate cuts in 2024 could effectively raise the inflation-adjusted “real” rate.
Earlier this year, Fed officials had expected to cut rates by a full percentage point in 2024, but the revised forecast indicates a more modest half-percentage-point cut. Powell emphasized the need for convincing evidence that the appropriate interest rate level has been reached to achieve the Fed’s inflation target.
A Shifting Outlook and Hope for a Soft Landing
Despite the Fed’s unwavering stance on inflation, there is a noticeable shift in outlook. While Powell did not classify it as the Fed’s “baseline” scenario, he indicated that a sought-after “soft landing” might be in the making. Powell stated that the path had likely “widened,” suggesting a growing sense among central bankers that a soft landing could be possible.
Projections also point in this direction, with Fed policymakers expecting inflation to decrease even as GDP continues to grow, and the unemployment rate remains below 4.1%. The median GDP forecast among policymakers for 2023 stands at 2.1%, significantly higher than earlier estimates.
Implications for Businesses and Households
Despite earlier investor expectations of significant rate cuts in the near future, the Fed’s projections indicate that many officials anticipate the policy rate to remain above 5% through next year. This scenario is expected to lead to tighter credit conditions and higher borrowing costs for businesses and households.
The Fed’s hawkish stance is a response to the robust economic performance, with inflation decreasing without significant job losses or economic downturns. Olu Sonola, head of US regional economics at Fitch Ratings, noted that the Fed’s upward revision to growth and downward revision to the unemployment rate in 2024 indicates a central bank that is increasingly hopeful about achieving a soft landing.
Final Thoughts
In a unanimous decision, the Federal Reserve’s statement underscores its commitment to address inflation while keeping an eye on economic stability. The central bank’s hawkish turn represents a delicate balancing act, as it seeks to navigate the economy toward a “soft landing” amid ongoing inflationary pressures. As the Fed charts this new course, its effectiveness in taming inflation while maintaining economic growth will be closely watched by financial markets and the broader public.