The US Federal Reserve held interest rates steady on Wednesday but stiffened its hawkish stance, with another rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.

As they did in June, Fed policymakers at the median still see the central bank’s benchmark overnight interest rate peaking this year in the 5.50 to 5.75 per cent range, just a quarter of a percentage point above the current range.

But from there the Fed‘s updated quarterly projections show rates falling by only half a percentage point in 2024 compared to the full percentage point of cuts anticipated at the meeting in June.

With the federal funds rate falling to 5.1 per cent by the end of 2024 and 3.9 per cent by the end of 2025, the central bank’s main measure of inflation is projected to drop to 3.3 per cent by the end of this year, to 2.5 per cent next year and to 2.2 per cent by the end of 2025. The Fed expects to get inflation back to its 2 per cent target in 2026, which is later than some officials had thought possible.

“Inflation remains elevated,” the rate-setting Federal Open Market Committee (FOMC) said in a policy statement that included projections incorporating stronger economic and job growth than prior forecasts, and keeping prospects for a “soft landing” squarely in view.

Financial markets had widely expected that the Fed would leave rates unchanged.

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Fed Chair Jerome Powell kept the central bank’s options for action open.

“We are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said in a press conference after the release of the statement and projections. “We’re prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”

Ahead of the Fed meeting, investors had been banking on significant Fed rate cuts next year, an expectation clouded by the projections that show 10 of 19 officials see the policy rate remaining above 5 per cent through next year.

Bond yields moved higher in the face of the Fed‘s higher-for-longer monetary policy stance, with the two-year Treasury note rising to its highest since July 2006.

Stocks ended the session lower, while the dollar erased its losses to trade up on the day against a basket of major currencies. Federal funds futures showed traders had downgraded their estimates of Fed rate cuts ahead.

‘Plausible outlook’

The new projections include a substantial markup of economic growth: After expecting growth as weak as 0.4 per cent for this year in earlier projections, the Fed now sees the economy growing 2.1 per cent in 2023.

The unemployment rate is also seen remaining steady at around 3.8 per cent this year and rising to just 4.1 per cent by the end of the year - a vote of confidence in the possibility of containing the worst breakout of inflation since the 1980s without significant job losses.

But the projections also threaten companies and households with the possibility of even tighter credit conditions and higher borrowing costs than they have already absorbed during the Fed‘s aggressive two-year battle to contain inflation.

The forecasts, however, also show the Fed‘s rising confidence that it can win the battle against inflation without sending the economy into a painful downturn.

“I’ve always thought the soft landing was a plausible outlook,” and that’s still true, Powell told reporters. But he also cautioned that the central bank’s new forecasts are not an official view and that projections are often wrong.

Economists also saw central bank officials as being more confident in the soft-landing scenario.

“The message conveyed in their upward revision to growth and their downward revision to the unemployment rate in 2024 clearly indicate a Fed that has dialed up their expectation for a soft landing, despite higher for longer rates,” said Olu Sonola, head of US regional economics at Fitch Ratings.

The Fed‘s forecasts, however, caught some observers off guard, especially in the new view of a slower-than-thought decline in inflation pressures.

Omair Sharif, president of Inflation Insights, forecasting firm Inflation, said given the Fed outlook it’s not surprising to see a hawkish shift in the monetary policy outlook, while adding that when it comes to central bank officials’ outlook, “it’s oddly optimistic on the labour market and equally oddly pessimistic on core inflation this year.”

The Fed statement was approved unanimously after a two-day meeting that marked new Fed Governor Adriana Kugler’s debut on the central bank policymaking stage. REUTERS