Federal Reserve leaves interest rates unchanged, more hikes likely

The Federal Reserve maintained its interest rates at a 22-year high on Wednesday and indicated the necessity for another rate hike later this year to curb inflation, aiming to reach its 2% target. The central bank kept its benchmark interest rate within a 5.25%-5.5% range but anticipated that rates might conclude the year at 5.5%-5.75%, implying a forthcoming rate increase. Of the FOMC members, twelve favored one more rate hike in the year, while seven wanted to retain current rates until year-end. Officials now predict a 0.5% reduction in interest rates next year from the expected peak range of 5.5%-5.75%, signifying prolonged elevated rates compared to previous estimates. In June, officials had foreseen a full percentage point in rate cuts for 2024. The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index excluding food and energy, increased by 4.2% in July, up from 4.1% in June but lower than the first-half range of 4.5%-4.6%. Another inflation indicator, the "core" Consumer Price Index, rose 4.3% in August, slowing from July's 4.7%. Fed Chair Jerome Powell cited robust economic activity as the primary reason for considering another year-end rate hike. The Fed still sees inflation as "elevated" but lowered its year-end forecast from 3.9% to 3.7% and predicts it will decrease to 2.6% next year. The Fed acknowledges slower job growth and anticipates an unemployment rate of 3.8% this year, down from the previous 4.1%, remaining at that level through 2025. The GDP outlook for the year was raised to 2.1% from 1%, and next year's forecast increased to 1.5% from 1.1%. Fed officials exercise caution, weighing cooling inflation data against the risk of stifling the economy. Powell emphasized the importance of restoring price stability to avoid prolonged economic uncertainty due to recurring inflation.