Fed halts rate hikes as inflation decline slows, growth outlook brightens

A halt in interest rate hikes has been announced by the Federal Reserve, reflecting a response to an unexpectedly robust economy and a reduced pace in inflation decline. In order to simultaneously tackle both economic risks and inflation control, the Federal Open Market Committee unanimously agreed to maintain the current interest rate range.

In a statement following the announcement, Fed Chairman Jerome Powell highlighted that the effects of tightened monetary policy have not been fully felt. He added that while the path ahead for interest rates remains undecided, the July FOMC meeting could bring about another rate increase. The majority of officials anticipate further rate hikes in 2023, giving a hawkish tone to the interest rate decision.

The median outlook for policymakers showed projections of the benchmark overnight interest rate increasing from its current 5% to a range between 5.5% and 5.75% by year-end. Nine of the 18 Fed officials foresee the policy rate achieving that height, with three expecting it to go even higher. Two officials predict rates to remain constant, while four consider that an additional quarter-percentage-point rise might be appropriate.

By 2024, policymakers see potential for 100 basis points of rate reductions, alongside rapidly depleting inflation. The combination of this outlook and the new projections points towards a reestablishment of quarter-percentage-point rate hikes commencing in the next policy meeting scheduled for July.

Investors were caught off guard by the hawkish nature of the FOMC members’ increased interest rate outlook, according to Sam Stovall, chief investment strategist at SFRA Research. US stocks dipped as a result of the decision, and futures contracts traders tied to the policy rate revealed a 75% probability of another rate increase next month.

As the economic outlook brightens, inflation is expected to fall more slowly. Fed officials’ median outlook sees economic growth in 2023 at 1%, up from the 0.4% prediction made in March. Furthermore, individuals now anticipate the unemployment rate rising to just 4.1% by year-end, compared with the earlier 4.5% forecast. The current jobless rate sits at 3.7%.

Such an economic performance suggests that inflation will decline at a slower pace, with the core Personal Consumption Expenditures Price Index projected to fall from 4.7% to 3.9% by the end of 2023. This stands in contrast to the 3.6% year-end rate expected in the March policymaker projections.

The Federal Reserve’s announcement halts a streak of ten consecutive rate increases, initially enacted to combat the worst inflation outbreak in four decades. Since the beginning of this tightening cycle in March 2022, the central bank’s policy rate has risen by a total of five percentage points, reaching its highest level since the start of the 2007-2009 recession.