Introduction

In a decision released on Wednesday, the Federal Reserve announced that it will keep interest rates steady for now. However, they also indicated that one more hike can be expected before the end of the year, and fewer cuts are projected for next year compared to previous estimates.

Outlook and Projections

The Federal Reserve’s projections suggest that if the final increase is realized, it would mark the end of this rate hike cycle, making a total of twelve hikes since March 2022. The rate is currently in a range between 5.25% and 5%, the highest in 22 years.

The projections, known as the dot-plot, show the likelihood of one more increase this year and two cuts in 2024. This is two fewer cuts than what was projected in June. The median outlook puts the funds rate at around 5.1%.

While twelve participants at the meeting supported the additional hike, seven opposed it. In addition, the projection for the fed funds rate in 2025 moved higher to 3.9% compared to the previous estimate of 3.4%. The FOMC members also pointed to a funds rate of 2.9% in 2026, which is above the Fed’s long-run expected neutral rate of 2.5%.

Economic Growth Expectations

The FOMC members significantly revised their economic growth expectations. They now anticipate a 2.1% increase in gross domestic product (GDP) this year, more than double the June estimate. The 2024 GDP outlook also improved to 1.5% from 1.1%.

The outlook for inflation, as measured by the core personal consumption expenditures price index, decreased to 3.7% from June’s estimate. The unemployment rate projection also improved to 3.8% compared to the previous estimate of 4.1%.

Changes in Statement and Fed’s Actions

The post-meeting statement reflected adjustments in the economic outlook. The committee described economic activity as “expanding at a solid pace” and mentioned that job gains have slowed but remain strong.

Aside from holding rates at high levels, the Federal Reserve continues to reduce its bond holdings, which has already reduced the central bank balance sheet by $815 billion since June 2022. They allow maturing bonds to roll off rather than reinvesting them, up to $95 billion in proceeds each month.

Economy and Public Opinion

The U.S. economy is currently in a delicate position. Fed officials have shifted their thinking from being focused on tackling inflation to adopting a more balanced view. They are cautiously optimistic about achieving a soft landing for inflation without triggering a recession.

The jobs picture has been strong, with a 3.8% unemployment rate, slightly higher than a year ago. Inflation data has improved, but it remains above the Fed’s target. Consumer spending remains resilient despite diminishing savings and growing credit card debt.

However, public opinion surveys show anxiety regarding the current state of the economy. In a recent AsumeTech All-American Survey, a record-high 69% of respondents expressed dissatisfaction with the U.S. economy.

Conclusion

The Federal Reserve’s decision to keep interest rates steady reflects their expectations of one more hike before the end of the year. The outlook for economic growth has improved, but challenges and uncertainties remain. It is important to note that these projections are subject to change, and updates will be provided as new information becomes available.