As expected, the U.S. central bank decided to pause interest rates after an extensive review of economic data. This news was anticipated after inflation data show that inflation rate kept declining steadfastly. The central bank’s Summary of Economic Projections shows officials see core PCE inflation ending the year at 3.9%, nearly double the Fed’s target.
Inflation is currently at 4%, which is far above the 2% target. That suggests some further falling this year in core PCE, which was rising in April at a 4.7% annual rate. But it also shows officials are now more pessimistic about their progress in reining in inflation: The last set of projections showed the Fed forecasting core PCE would close out 2023 at 3.6%.
Pausing interest rates though does not mean cutting them. As central bank chair Jerome Powell stated, interest rates for this month will remain “unchanged.” Interest rates are currently at 5%. This means that commercial banks cannot lend money to each other below this rate. Thus, the credit market remains tight.
Not all forecasts, however, were dour. Fed officials see economic growth for the fourth quarter of this year coming in at 1%, up from the 0.4% projection issued in March. They also expect the unemployment rate to close out the year at 4.1%, down from the previous prediction of 4.5%.
The call to pause interest rates, which was expected, keeps the target for the federal-funds rate at 5% to 5.25% but leaves the door open for future increases that could come as soon as the July meeting. The central bank raised rates ten times in an unbroken series of increases that began in March 2022.
Markets had widely been anticipating the Fed to “skip” this meeting, which implies a longer-range plan to keep rates where they are. The expectation leaned heavily against an increase after policymakers, particularly Jerome Powell and Vice Chair Philip Jefferson, had indicated that some change in approach could be in order.
The surprising aspect of the decision came with the “dot plot” in which the individual members of the Federal Open Market Committee indicated their expectations for rates further out. The dots moved decidedly upward, pushing the median expectation to a funds rate of 5.6% by the end of 2023. Assuming the committee moves in quarter-point increments, that would imply two more hikes over the remaining four meetings this year.
FOMC members approved today’s move unanimously, though there remained considerable disagreement among members. In fact, two members indicated they see hikes this year while four saw one increase and nine, or half of the committee, expect two. Two more members added a third hike while one saw four more., again assuming quarter-point moves.
Fed Chair Jerome Powell noted that unemployment, at 3.7%, remains much lower than what the Fed has anticipated. Meanwhile, economic growth actually appears to be picking up, he said, citing a recent forecast from the International Monetary Fund. In addition to an apparent slowdown in price increases, the labor market is also showing signs of weakness, he said, citing higher jobless claims, reduced hours worked, and lower demand for temporary payrolls.