The Federal Reserve announced on Wednesday that it will keep interest rates steady for the seventh consecutive time and has adjusted its outlook for rate reductions due to lingering high inflation. The latest quarterly economic projections indicate that most Fed officials expect rates to reach 5.1% by the end of 2024, suggesting only one quarter-point rate cut this year, a significant shift from the three cuts predicted in March.
Despite a decrease in inflation from its peak, price pressures have remained higher than anticipated. The Fed's preferred measure shows inflation running at a 2.7% pace, well above the central bank's 2% target. Core inflation, excluding food and energy, was even hotter at 2.8%.
Policymakers have left the possibility of rate cuts open but emphasized the need for "greater confidence" that inflation is decreasing before lowering borrowing costs. Rent prices stagnating suggest that high inflation may persist.
The Fed raised interest rates sharply in 2022 and 2023 to slow the economy and combat inflation. Officials now face the challenge of determining when to ease off these measures. Despite expectations for multiple rate cuts this year, plans have been delayed as inflation has eased in recent months.
While inflation rose less than expected in May, the Fed anticipates stickier inflation in 2024 and has adjusted its forecasts accordingly. The central bankers now predict inflation to cool to 2.6% by the end of 2024 before falling to 2.3% in 2025.
The labor market continues to show strength, with employers adding 272,000 new workers in May. Job openings remain above pre-pandemic levels, although the unemployment rate has slightly increased to 4%.
Overall, the Fed's decision to hold interest rates steady and adjust its outlook for rate reductions reflects the ongoing challenges posed by high inflation and the need for careful consideration in managing monetary policy.