The Fed holds rates steady, pausing its rate-hiking campaign

The Federal Reserve said Wednesday it would pause its historic rate-hiking campaign as it waits for the effects to trickle further through the economy, but signaled that additional rate hikes are likely this year.

The vote to skip a rate increase this meeting was unanimous.

Since March 2022, Fed officials have raised the central bank's benchmark interest rate 10 times in a row in an attempt to cool the US economy and battle inflation that is still double the Fed's target.

The Fed's post-meeting statement confirmed that officials deem the pause a prudent move, but most officials think additional hikes are necessary this year, according to the Fed's latest Summary of Economic Projections.

"Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down 2% over time," Fed Chair Jerome Powell said in his post-meeting news conference.

Most officials estimate the federal funds rate will top out at a range of 5.63-5.87% in 2023, suggesting there might be as many as two more quarter-point hikes this year. Rate increases larger than a quarter point are not likely since the Fed is inching closer to its inflation goal and officials thought it made "obvious sense to moderate our rate hikes as we got closer to our destination," Powell said.

Future policy moves depend on what economic indicators show in the coming weeks and months, including the resilient job market. Payroll growth remains solid, as do wage gains, which put some upward pressure on prices. Top economists argue the still-tight labor market will prove to be a stubborn source of inflation that would need to rebalance in order to help inflation successfully fall to the central bank's 2% target. Most officials in the Federal Open Market Committee, which sets monetary policy, expect the unemployment rate to rise to a range of 4-4.1% this year.

"The Fed is putting more weight on the strong jobs data and sticky core inflation than the slowing headline inflation numbers and is clearly trying to avoid a 1970s style resurgence in inflation," wrote Seema Shah, chief global strategist at Principal Asset Management, in an analyst note. "The Fed had to do something to knock market optimism today, otherwise it risks a tougher inflation fight and deeper economic woes down the line."

Although the Fed thinks additional policy action is necessary to successfully tamp down inflation, Powell said he's optimistic about inflation cooling further because of slowing shelter costs, which make up more than 40% of the Consumer Price Index's core measure.

"You are seeing there that new rents, new leases are coming in at low levels and it's really a matter of time for that to go through the pipeline," he said. "I think any forecast that people are making right now about inflation coming down this year will contain a big dose - this year or next year - will contain a good amount of disinflation from that source."

Officials are also keeping a close watch on how credit conditions shape up, considering some lingering stress in the regional banking sector. Banks have been toughening their lending standards this year, and that is expected to continue. That would take some steam out of spending if US consumers have a harder time accessing credit to fund their lifestyles, especially since they have racked up debt in recent months. Americans will soon cut back on goods purchases as the shift toward services spending continues, economists say.

"The economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity and inflation," Powell said. "The extent of these effects remains uncertain."

Officials expect the Personal Consumption Expenditures price index to hover slightly above the central bank's 2% target in 2024, but not fully reach 2% until 2025.

Economists say the July meeting will be a close call and Powell said in his presser that officials will examine "a three-month period of data" for that decision.

"We'll also look at the evolving risk picture of what's happening in the financial sector, we'll look at all the data and the evolving outlook, and we'll make a decision," he said.