The Federal Reserve, in a surprising move, has kept rates steady but signaled a more hawkish outlook than anticipated. The central bank is forecasting two more hikes as inflation continues to exceed targets.
Interest Rate Projections
The Federal Open Market Committee (FOMC) maintained its federal funds rate in a range of 5% to 5.25%. This marks the first time in over a year that the Fed has decided to keep rates steady. However, the central bank has indicated that it is not done with hikes, projecting two more for the year.
The Fed has raised its benchmark rate forecast to a terminal rate, or peak rate, of 5.6% at the midpoint in 2023. This is up from a previous forecast of 5.1% seen in March, suggesting two more hikes are in the pipeline.
Inflation Expectations
The steeper-than-expected path of rate hikes comes as FOMC members expect inflation, which is currently well above the Fed’s 2% target, to accelerate. The price index, the Fed’s preferred measure of inflation, is forecast to be 3.9% in 2023, up from a previous forecast of 3.6%.
Labor Market and Economic Growth
The strength in the labor market, which underpins wages and plays a significant role in services inflation, is also expected to continue. The unemployment rate is projected to be 4.1% in 2023, down from a previous estimate of 4.6%.
The improved outlook on the labor market was reflected in the FOMC’s outlook on the economy. Growth, or GDP, estimates were raised to 1% for 2023, up from 0.4% previously.
Fed’s Decision and Market Reaction
The Fed’s decision to maintain rates comes as FOMC members are keen to assess the impact of hikes delivered so far, and the degree of tightening in lending standards following recent banking turmoil. The Dow closed lower after the Federal Reserve’s announcement, reflecting the hawkish Fed outlook.