As anticipated, the Federal Reserve decided this Wednesday to hold the federal funds rate in a corridor of 5.25% to 5.50%. The central bank left the rate unchanged at the end of July, ensuring that the cost of money in the United States remains at its highest level since January 2001. Yet, the dollar is not expected to surge further after this decision. The unanimous decision to pause follows an eleven-quarter point climb since March 2022, aimed at taming inflation. The Fed signaled openness to resuming rate increases later if necessary, and most policymakers expect at least one additional hike before year-end (Fed communications).
Powell stated that he is ready to raise again if needed and that policy will stay restrictive until inflation demonstrates a clear and sustained move toward the 2% target. In assessing the appropriate degree of tightening, the committee notes that it must consider how monetary policy affects economic activity and inflation, as well as evolving economic and financial developments (Powell remarks).
Officials explained that seven Federal Reserve members currently favor further increases, while twelve others anticipate the possibility of another rise at one of the two meetings looming before year-end, anticipated in November and mid-December. The central tendency for the end-of-year funds rate remained around 5.5% to 5.6%, with markets pricing in higher levels for 2025 and 2026. Projections show the rate staying higher for longer with gradual reductions later, reflecting a cautious stance on inflation and growth (Fed projections).
Powell underscored that pausing today does not imply the Fed has reached a proven restrictive level. Rather, it signals that the cumulative effects of prior increases are allowing room to assess progress toward the inflation target. The committee paused rate hikes in June, and subsequent moves in July have been part of a careful calibration. While some analysts see the cycle as near its peak, others believe another uptick remains possible (market commentary).
Macroeconomic forecasts
The decision rested on a fresh set of macroeconomic projections. The Fed now estimates annual inflation at 3.3% for this year, 2.5% next year, and 2.2% in 2025, with inflation returning to the 2% goal by 2026. This is a modest upgrade from the projections issued in June, which had 3.2%, 2.5%, and 2.1% respectively (Fed forecast update). For the core CPI, which excludes the most volatile energy and food prices, the projections are 3.7%, 2.6%, and 2.3% for the same periods, inching toward the 2% target by 2026 (central bank projections).
Growth forecasts were also revised higher. The Fed keeps 2025 growth at 1.8% after nudging 2024 estimates to 2.1%, with 2026 projected at 1.5%. The unemployment rate is expected to rise gradually, reaching around 3.8% in the near term, then around 4.0% to 4.1% over the next few years, a sign of a steadier labor market amid tighter policy (Fed projections).
Headline inflation, which had surged as high as 9.1% in mid-2022, has moderated substantially. Nevertheless, August CPI rose to 3.7%, up from July, while the core CPI, which excludes energy and food, cooled from 4.7% to 4.3% on the year. These results reinforce the Fed’s view that higher policy rates have begun to cool demand, even as the economy shows resilience. Real GDP advanced at a modest pace in early 2024, with unemployment inching higher from the low levels seen last year (economic data releases).