The US Federal Reserve still expects to raise interest rates one more time this year, even after holding steady at the latest Federal Open Market Committee (FOMC) meeting, as central banks around the world continue to combat above target inflation.
On Wednesday in the US, the Fed announced its widely anticipated decision to maintain the target range for the federal funds rate at a 22-year high of 5.25 to 5.5 per cent.
But in another sign that rates will remain higher for longer, the FOMC post meeting statement said another 25 basis points (bps) hike is envisaged at the Fed’s meeting in either November or December, which could then be followed by two cuts of 25 bps throughout 2024.
The median forecast in the Summary of Economic Projections, released alongside the Fed’s decision, showed that interest rates are expected to hit 5.6 per cent at the end of 2023 before falling to 5.1 per cent in 2024 and 3.9 per cent in 2025.
“These projections, of course, are not a committee decision or plan,” Federal Reserve chair Jerome Powell said.
“If the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals. We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks.”
The median projection for the Fed’s preferred measure of inflation (PCE) is 3.3 per cent in 2023 and 2.5 per cent in 2024 before reaching the central bank’s 2 per cent target in 2026.
“Inflation has moderated somewhat since the middle of last year, and longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” said Mr Powell.
“Nevertheless, the process of getting inflation sustainably down to 2 per cent has a long way to go.”
The Summary of Economic Projections also included significant upwards revisions for US GDP compared to June, bolstering the possibility of a soft landing in the world’s largest economy.
GDP in the US is now projected to increase by 2.1 per cent this year (up from 1.0 per cent) and 1.5 per cent next year (up from 1.1 per cent).
Seema Shah, chief global strategist at Principal Asset Management, argued that the Fed’s “hawkish pause” and the prospects of another rate hike this year should not come as a surprise, since economic data in the US remains “undoubtedly strong”.
“Indeed, although rates have already peaked, the uncertain economic and inflation path suggests the Fed should keep its options open,” she said.
“Beyond the question of an additional 2023 rate hike, the main theme of [Wednesday’s] FOMC meeting was that a soft landing implies less space for rate cuts next year. It’s an important reminder for investors: higher for longer is not a new narrative, but without recession, it will be even higher for longer.”
Mr Powell indicated that the Fed was now in a position to proceed “carefully” as it continues to assess incoming data and the evolving outlook and risks”.
“We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective,” he said.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The Reserve Bank of Australia (RBA) similarly acknowledged that interest rates had increased significantly over a short period and that the effects of tighter monetary policy had yet to fully flow through as part of its decision to hold in September.
Australia’s central bank has maintained that further tightening may still be required if inflation proves to be more persistent than expected. The RBA currently expects inflation will decline to 3.3 per cent by the end of 2024 and be back within its 2 to 3 per cent target range by late 2025.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.