The Federal Reserve kept its key lending rate unchanged Wednesday, but lifted the upper-end of its near-term rate forecast, suggesting the central bank still feels tighter financial conditions are needed to combat the current elevated levels of inflation.
The Fed kept the federal-funds rate on hold at between 5% to 5.25%, snapping a streak of 10 consecutive increases that lifted it to the highest since 2007. The move followed its two-day policy meeting in Washington amid an easing in headline inflation pressures and moderating economic growth.
However, in the Fed's summary of economic projections, also known as the 'do plots,' which indicates the prospective forecasts of voting and nonvoting members of the Federal Open Market Committee, the median view of the federal-funds rate by year's end was marked 0.5 point higher, at 5.6%, compared with the March release.
That suggests the potential for at least two more rate hikes between now and December, the Fed's last policy meeting of the year, although Fed Chairman Jerome Powell would not confirm whether a decision for the July meeting had been made.
"Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy," the Fed statement said.
"In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
U.S. stocks pared gains quickly following the Fed statement with the S&P 500 marked 5 points higher on the session while the Dow Jones Industrial Average fell 197 points, although much of the move was pegged to the single-day decline for UnitedHealthcare (UNH). The tech-focused Nasdaq was marked 30 points higher.
Benchmark 10-year Treasury note yields were marked 6 basis points higher at 3.819% while 2-year notes gained 12 basis points to 4.735%. The U.S. dollar index, meanwhile, was marked 0.1% lower at 103.240 against a basket of six global currency peers.
CME Group's FedWatch now suggests a 61.5% chance that the Fed will lift rate by 25 basis points (0.25 percentage point), to between 5.25% to 5.5% at its next policy meeting in July.
Yesterday's reading for May inflation, which at 4% was the 11th consecutive monthly decline for the headline consumer price index, was modestly softer than expected and largely cemented the market's assumption that the Fed would skip a rate hike at this meeting as it assesses the impact of its 500 basis points of policy tightening on the broader economy.
From the Fed's perspective, however, growth has remained firmly resilient in the face of the most aggressive tightening cycle since the early 1980s: The economy added 339,000 new jobs last month, the Labor Department reported last week, taking the year-to-date total past 1.2 million and 10.1 million positions were left unfilled over the month of April.
"This pause is very much the Fed in wait and see mode – it will still be looking for its action to date to take effect in the economy, and thus won’t want to slam the brakes on too hard," said David Henry, investment manager at Quilter Cheviot.
"On the flipside, however, we can’t expect a pivot to rate cuts anytime soon either, and instead rate rises are still on the table for the next meeting."
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