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Federal Reserve Chair Jerome Powell made clear Wednesday the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy.
After a series of rapid rate hikes over the past 18 months, the Fed can now “proceed carefully,” Powell said — a sentiment he repeated at least a dozen times Wednesday during a press conference that followed the central bank’s decision to leave rates unchanged.
In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year.
The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.
The projections also showed they expect inflation to fall below 3% next year, and return to their 2% target by 2026. In other words, the “soft landing” for the US economy that looked more remote three months ago now seems within reach.
The US economy has so far been resilient against the Fed’s historic tightening campaign, which lifted the target range for the federal funds rate from nearly zero in March 2022 to 5.25% to 5.5% in July, a 22-year high. Consumer spending remains strong and the labor market has been steady, though job growth is starting to moderate.
During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally.
Treasuries sold off after the decision, with the yields on two-, five- and 10-year US government bonds all rising to the highest in more than a decade. Wednesday’s 0.9% drop for the S&P 500 was the second-worst this year on a Fed day, second only to the 1.7% decline registered in March.
The Fed chief also cautioned that a soft-landing scenario was not yet guaranteed, saying it was not the Fed’s baseline expectation — despite what the latest projections implied.