US Federal Reserve to Maintain Interest Rates, Expects Rate Hike by Year End

The US Federal Reserve will keep interest rates unchanged, but a rate hike is anticipated by year end. Monetary policy will remain tighter through 2024. Stay informed with our blog.

The US Federal Reserve has announced that it will maintain interest rates at their current level. However, the central bank has adopted a more hawkish approach, indicating that a rate hike is expected by the end of the year. Additionally, monetary policy will remain significantly tighter through 2024 compared to previous expectations.

Similar to the forecasts made in June, Fed policymakers anticipate that the bank's benchmark overnight interest rate will peak this year within the range of 5.50% to 5.75%. This represents a mere 0.25% increase from the current range. Notably, the updated quarterly projections reveal that rates are expected to decrease by only 0.5% in 2024, in contrast to the 1% cut previously predicted during the June meeting.

Looking ahead, it is projected that the federal funds rate will decline to 5.1% by the end of 2024 and 3.9% by the end of 2025. In alignment with these rate changes, the Fed's primary inflation gauge is anticipated to drop to 3.3% by the close of this year, followed by further decreases to 2.5% next year and 2.2% by the end of 2025.

While it was widely anticipated that the Fed would maintain the current interest rates, investors had also expected substantial rate cuts in the coming year. However, the updated projections, of the 19 officials surveyed, indicate that 10 believe the policy rate will remain above 5% throughout next year. This conflicting view has created some uncertainty regarding future rate cuts.

The Fed's latest projections have also seen a significant revision in economic growth forecasts. Previous estimates had initially suggested a growth rate as low as 0.4% for this year. However, the updated projections paint a more optimistic picture, with the Fed now predicting a 2.1% growth rate in 2023.

Furthermore, the projections indicate that the US unemployment rate will remain steady at approximately 3.8% this year, with a slight increase to 4.1% by the end of the year. This signifies confidence in the ability to contain the current surge in inflation, which is the most severe since the 1980s, without causing significant job losses.

Nevertheless, the updated projections come with a warning for companies and households. There is a possibility of even tighter credit conditions and higher borrowing costs compared to what they have already experienced during the Fed's ongoing two-year battle to control inflation. Consequently, the Fed's philosophy of "higher for longer" is reflected in these updated projections.

In conclusion, the US Federal Reserve has chosen to maintain interest rates at their current level. However, the central bank has taken a more hawkish stance, signaling the likelihood of a rate increase by the end of the year. With a tighter monetary policy expected through 2024, the Fed's projections highlight potential challenges such as tighter credit conditions and higher borrowing costs. These updated forecasts emphasize the Fed's commitment to managing inflation while also fostering economic growth.