U.S. Fed holds benchmark interest rate steady but hints another hike is coming

The U.S. Federal Reserve held interest rates steady on Wednesday but stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.

As they did in June, Fed policymakers at the median still see the central bank's benchmark overnight interest rate peaking this year in the 5.50 - 5.75 per centrange, just a quarter of a percentage point above the current range.

But from there the Fed's updated quarterly projections show rates falling only half a percentage point in 2024 compared to the full percentage point of cuts anticipated at the meeting in June. With the federal funds rate falling to 5.1 per centby the end of 2024 and 3.9 per centby the end of 2025, the central bank's main measure of inflation is projected to drop to 3.3 per centby the end of this year, to 2.5 per cent next year and to 2.2 per centby the end of 2025.

"Inflation remains elevated," the rate-setting Federal Open Market Committee (FOMC) said in a policy statement that included projections incorporating stronger economic and job growth than prior forecasts, and keeping prospects for a "soft landing" squarely in view.

Financial markets had widely expected that the Fed would leave rates unchanged.

But investors have also been banking on significant Fed rate cuts next year, an expectation clouded by the projections showing 10 of 19 officials see the policy rate remaining above 5 per centthrough next year.

12 of 19 officials at the Fed see one more hike this year, according to their "dot plot" projections.

Fed Chair Jerome Powell will elaborate on the statement and economic outlook in a press conference at 2:30 p.m.

The new projections include a substantial markup of projections for economic growth: After expecting growth as weak as 0.4 per centfor this year in earlier projections, the Fed now sees the economy growing 2.1 per centin 2023.

The unemployment rate is also seen remaining steady at around 3.8 per centthis year and rising to just 4.1 per centby year's end a vote of confidence in the possibility of containing the worst breakout of inflation since the 1980s without significant job losses.

But the projections also threaten companies and households with the possibility of even tighter credit conditions and higher borrowing costs than they have already absorbed during the Fed's aggressive two-year battle to contain inflation, embodying a philosophy of "higher for longer" into the latest projections.

The Fed statement was approved unanimously after a two-day meeting that marked new Fed Governor Adriana Kugler's debut on the central bank policymaking stage.