Fed keeps interest rates unchanged – What's next?

At the end of the two-day meeting Federal Open Market Committee kept interest rates stable at 5,25-5,5%, the highest level in 22 years.

Federal Reserve However, it tightened its hawkish stance, forecasting another increase in interest rates by the end of the year and maintaining a much more restrictive monetary policy until 2024. Median Fed policymakers still see the central bank's benchmark interest rate peaking in the 5,50-5,75% range this year, just a quarter of a percentage point above the current range.

New FED projections

The Fed's updated quarterly forecasts indicate that interest rates will fall  in 2024 only half a percentage point above the current range.

However, from there, the Fed's updated quarterly projections show interest rates falling by only half a percentage point in 2024 compared to the full percentage point of cuts projected at the June meeting.

With the federal funds rate falling to 5,1% by the end of 2024 and 3,9% by the end of 2025, the main measure inflation central bank is expected to fall to 3,3% by the end of this year, to 2,5% next year and to 2,2% by the end of 2025.

The new projections include a significant shift in economic growth forecasts: After earlier forecasts expected economic growth this year to be just 0,4%, the Fed now expects the economy to grow by 2023% in 2,1. It also shows that the unemployment rate remains steady at around 3,8%, a vote of confidence in the ability to stave off the worst inflation collapse since the 80s without significant job losses.

Market reaction after the announcement of the Fed's policy

The US dollar pared losses against a basket of currencies on Wednesday after the US Federal Reserve kept interest rates on hold but toughened its hawkish stance, forecasting a further rate hike by the end of the year. Following the Fed's decision, yields on two-year, rate-sensitive Treasuries hit 17-year highs on Wednesday. Wall Street retreated, and a S&P 500 index turned negative as the US Federal Reserve kept key interest rates unchanged, as widely expected, but warned that restrictive policies could remain in force until 2024.

From March 2022 to May 2023, the Fed raised interest rates at 10 consecutive meetings to combat the worst rise in inflation since the early 80s. In June, the Fed paused before raising rates again at its July meeting.

Data since the last Fed meeting, while broadly supporting the view that inflation is slowing amid continued economic growth, has been somewhat mixed as the pace of headline price growth has picked up recently. The upward pressure on prices shows signs of continuing.

There are also signs that the labor market is not as robust as before, which helps keep inflation in check: the pace of hiring has slowed. The number of Americans who started looking for a job also increased.

“Recent indicators suggest that economic activity is expanding at a solid pace. Job growth has slowed in recent months but remains strong and the unemployment rate remains low. Inflation remains elevated – we read in the statement of the American Fed.

“Tighter lending conditions for households and businesses are likely to weigh on economic activity, employment and inflation. The scale of these effects remains uncertain. “FOMC Pays Particular Attention to Inflation Risks.” - Fed said.