Fed keeps rates unchanged and signals optimism about a potential ‘soft landing’
WASHINGTON — The Federal Reserve left its benchmark interest rate unchanged Wednesday for the second time in its past three meetings, a sign that it’s moderating its fight against inflation as price pressures have eased.
The Fed’s policymakers also signaled that they expect to raise rates once more this year and envision their key rate staying higher in 2024 than most analysts had expected.
But as their latest policy meeting ended, the 19 members of the Fed’s rate-setting committee conveyed growing optimism that they will manage to slow inflation to their 2% target without causing the deep recession that many economists had feared. It’s a hopeful scenario that economists call a “soft landing.”
In a set of new quarterly projections, the policymakers showed that they expect faster economic growth and lower unemployment this year and next year than they had foreseen just three months ago. Even with solid growth in sight, they also think inflation will continue to cool.
Those expectations suggest that Fed officials feel “they’re going to be able to do what it takes to achieve gradual disinflation without disruption to the labor market, or without triggering a meaningful recession,” said Subadra Rajappa, head of rates strategy at Societe Generale.
Since peaking at a year-over-year high of 9.1% in June 2022, consumer inflation in the United States has dropped to 3.7%. Speaking at a news conference Wednesday, Chair Jerome Powell cautioned that the Fed still wants further assurance from forthcoming economic data that inflation is on a sustainable path back to its target level. But he suggested that the Fed is getting closer to the end of its rate-hiking cycle and that a soft landing seems “plausible.”
“We’re fairly close, we think, to where we need to get,” Powell said. “A soft landing is a primary objective. … That’s what we’ve been trying to achieve all this time.”
The Fed’s latest decision kept its benchmark rate at about 5.4%, the result of the 11 rate increases it unleashed beginning in March 2022. Those rapid hikes, Powell said, now allow the central bank to take a more measured approach to its rate policy.
“We’re taking advantage of the fact that we moved quickly in the past,” he said, to manage rates “a little more carefully now as we sort of find our way to the right level of restriction that we need to get inflation back down to 2%.”
Fed officials expect to cut interest rates just twice next year, fewer than the four rate cuts they had forecast in June. They predict that their key short-term rate will still be 5.1% at the end of 2024 — higher than it was from the 2008-2009 Great Recession until May of this year.
Yet one reason they likely have reduced the number of expected rate cuts for 2024 is a positive one: They think a recession, which would require multiple rate cuts to aid the economy, is less likely to occur.
“What we have right now is what’s still a very strong labor market that’s coming back into balance,” Powell said. “We’re making progress on inflation. Growth is strong.”
Though Fed officials have projected one more rate hike this year, Powell appeared to hedge more than he typically does on whether that will prove necessary.
Treasury yields moved sharply higher Wednesday after the Fed issued a statement after its latest policy meeting and updated its economic projections.
In their new quarterly projections, the policymakers estimate that the economy will grow faster this year and next year than they had previously envisioned. They now foresee growth reaching 2.1% this year, up from a 1% forecast in June, and 1.5% next year, up from their 1.1% forecast.
