At the same time, central bankers slightly downgraded their expectations for inflation to ease this year. And they now plan to keep rates higher for longer, with the new projections showing fewer rate cuts in 2024 and 2025 than previous estimates.
“Recent indicators suggest that economic activity has been expanding at a solid pace,” a Fed statement said. “Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
The statement continued: “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain.”
As markets absorbed the news, the Dow Jones industrial average rose 124 points, or 0.36 percent. The S&P 500 index was essentially flat, and the Nasdaq was down 0.41 percent.
The announcement leaves the Fed’s baseline policy rate, known as the federal funds rate, at a level between 5.25 and 5.5 percent. That’s the highest in 22 years, after the central bank spent the past year scrambling to hoist borrowing costs and soften demand for all kinds of expenditures and investment to slow price increases.
Now the Fed’s internal debate revolves around whether to hold rates steady or keep pushing them up later this year. Much will depend on how the economy evolves over the next few months — and whether any new shocks thwart the Fed’s careful examination of the post-covid world.
“They clearly don’t want to declare victory early, even though they’ve made great progress,” said Diane Swonk, chief economist at KPMG. “They themselves are surprised. But how much spillover do you get from diesel fuel going up? There’s uncertainty about how wide strikes could be, or a government shutdown. This is all noise they have no control over.”
In many ways, the Fed’s fight to slow down an overheated economy has turned out better than expected. The markets, businesses and individual households have absorbed high rates without the country crashing into a recession. Employers are still hiring — and at a more sustainable pace. Consumers continue spending money on vacations, concert tickets and dining out, and there’s little indication that the spigot will shut off anytime soon.
But the Fed has made clear that there is more work to do on prices. Inflation has eased significantly since peaking at 9.1 percent last summer, and came in at 3.7 percent in August. Still, that marked the second-straight bump in the annual inflation rate, which underscored officials’ warnings that zapping persistent price growth will not be a smooth process.
“We will need price stability to achieve a sustained period of strong labor market conditions that benefit all,” Fed Chair Jerome H. Powell said in a closely watched speech last month. “We will keep at it until the job is done.”
For weeks, the Fed signaled to financial markets and the broader economy that it would forgo a September hike. That’s because officials are in a new phase where they don’t need to race to raise rates, and can instead take more time to see how their policies are weighing on inflation, the job market and economic growth.
The Fed chief is likely to get questions on monetary policy and the odds of a recession, which experts say are becoming slimmer and slimmer. This month, Goldman Sachs cut the chances of a downturn to 15 percent over the next 12 months, from a previous forecast of 20 percent.
Powell could also get questions on other factors swirling around the economy. The Sept. 30 deadline for Congress to fund the government and avert a shutdown is inching closer. But Republican leaders are still trying to appease hard-right members of their party and get a stopgap funding measure out of the House.
Meanwhile, United Auto Workers union leaders are threatening to expand a historic strike against Detroit’s Big Three automakers unless there’s “serious progress” toward an agreement. The union is seeking higher pay, broader benefits and better job protections as the car industry shifts toward electric vehicles. Cars aren’t immediately expected to become more expensive. But a longer strike would have more impact for consumers.
Through it all, many Americans still feel gloomy about the economy, according to national polls and surveys. The Fed’s job doesn’t involve getting people to feel better about the economy. But officials still want to show what they’ve done to tame inflation and emerge from the pandemic — while recognizing that many people aren’t feeling a difference in their daily lives.
“Concerns about inflation are still something that I hear when I talk to people,” Boston Fed President Susan Collins told The Washington Post last month. “From my perspective, what price stability means is a level of low, stable prices where people aren’t really focused on it. … And people are still quite focused on it.”
