Federal Reserve pauses rate hike drive but hints at more to come

The Federal Reserve held its benchmark interest rate steady for the first time in more than a year after 10 consecutive hikes but signaled its intention to implement more hikes this year.

At the end of its two-day meeting on Wednesday, the Federal Open Market Committee voted unanimously to skip another quarter-point rate hike and kept the federal funds rate at its current target range of 5 percent and 5.25 percent.

The pause in the US central bank’s aggressive monetary tightening campaign marked the first respite since it began raising rates in March 2022 and ushered in a new phase in its fight against extremely high inflation.

In a statement released on Wednesday, the FOMC said that skipping the rate hike would allow officials to gain “additional information and assess its implications for monetary policy”.

The Fed also released an updated “dot plot” that combines officials’ forecasts for the fed funds rate through the end of 2025. It indicated that most policymakers are forecasting two more quarter-point hikes this year, in a move that would lift the benchmark rate from 5.5 percent to 5.75 percent.

The Fed could implement additional rate hikes as early as next month, when its policymaking committee is due to meet again. For that reason, economists said Wednesday’s decision to keep rates steady amounted more to “quit” than “pause.”

In March, when the dot plot was last updated, most policymakers predicted that the central bank would not raise rates above current levels due to banking stress following the failure of Silicon Valley Bank and other lenders.

The Fed faces the difficult task of determining how much further to squeeze the economy, amid uncertainty about the extent to which the credit crunch will weigh on growth and hiring. Officials are also assessing the cumulative effect of their monetary tightening, noting that rate hikes take time to be fully felt in the real economy.

The Fed chair, Jay Powell, said last month that the central bank could afford to look at the data and make a “careful assessment” in terms of the path forward for policy.

Since then, the economic picture has been mixed and an intense debate has raged among officials about whether and when more rate hikes will be needed. Economists polled last week by the Financial Times believed the central bank would raise rates at least twice more this year, to between 5.5 percent and 6 percent.

The latest Consumer Price Index report released on Tuesday showed a decline in annual inflation despite persistent price pressures in many sectors of the economy. The labor market has lost some momentum but remains very strong, encouraging consumers to spend.