WASHINGTON – The United States Federal Reserve voted on Wednesday to pause its aggressive campaign of interest rate hikes despite “elevated” inflation, while indicating a sharp increase could be needed before the end of the year.

“It allows the economy a little more time to adapt as we make our decisions going forward,” Fed chairman Jerome Powell said in a press conference, after the decision was announced.

After 10 straight increases, the Fed’s rate-setting committee voted to hold its benchmark lending rate between 5 per cent and 5.25 per cent, the central bank said in a statement.

The decision gives policymakers on the Federal Open Market Committee (FOMC) time “to assess additional information and its implications for monetary policy”, the Fed said.

The move was broadly in line with analysts’ expectations.

But FOMC members also hinted that more monetary tightening lies ahead, raising the median projection for interest rates at the end of 2023 by another half percentage point.

This suggests the Fed may need to hike rates twice more before the year is out.

“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2 per cent over time,” Mr Powell said.

Higher growth ahead

The US economy has shown signs of slowing, with the Fed recently forecasting a mild recession to begin later in 2023.

But despite the Fed’s campaign of monetary tightening, annual inflation remains “elevated” above the US central bank’s long-term target of 2 per cent, the Fed said, while unemployment remains low.

Recent indicators also suggest “economic activity has continued to expand at a modest pace”, it added.

The Fed also released an updated economic forecast on Wednesday, lifting its 2023 gross domestic product growth projections to 1 per cent from 0.4 per cent in March.

Median inflation expectations for the year nudged down slightly to 3.2 per cent.

Core inflation, which excludes volatile food and energy prices, rose to an annual rate of 3.9 per cent, the Fed said.

Mr Powell said the economy faced “headwinds” from tighter credit conditions in the aftermath of the collapse of a number of regional lenders earlier in 2023.

“It may make sense for rates to move higher, but at a more moderate pace,” he said.

Hiking in July?

Ahead of Wednesday’s decision, FOMC members were split on the best path forward, with some calling for a hike and others calling for a pause.

In the end, the Fed settled on a unanimous decision to hold rates steady, while predicting a much more aggressive path ahead than many analysts expected.

“We expect the Fed to deliver another 25bp hike in July,” Bank of America US economist Michael Gapen wrote in a note to clients after the decision, adding that a further quarter percentage-point hike could be needed in September.

The US Fed has already lifted its benchmark lending rate by 5 percentage points since it began raising rates to fight inflation in March 2022.

On Wednesday, it indicated it will likely go further still in its campaign to bring inflation down for good. AFP