The Federal Reserve said on Wednesday it would hold interest rates steady as it evaluates its next steps amid a recent uptick in inflation.
Following a two-day meeting of its Federal Open Market Committee in Washington, the central bank announced it would keep its interest rate target at 5.25% to 5.50%. The move was expected, and investors anticipated it might raise rates again later this year.
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Still, the current rate target is the highest since 2006, before the global financial crisis.
Investors saw a 99% chance the Fed would pause this time, according to futures contract prices for rates in the short-term market targeted by the predictable Fed.
The Fed’s updated projections showed that Fed officials are split on whether there will be another rate increase this year, although slightly more of the FOMC participants estimate there will be one more quarter of a percentage point rate hike this year.
Back-to-back months of inflation reports show that price growth is starting to tick back up a bit even after more than a year of, at times, very aggressive tightening by the Fed.
The consumer price index rose to 3.7% in August from a low of 3% in June, and inflation as measured by the producer price index ticked up to 1.6% for the year ending in August, the second such month of increases for the indices.
If future inflation reports keep showing inflation trending upward, it will become more likely that the central bank will hike rates again, something that would further throttle economic growth and could harm the labor market — or even knock the economy into a recession.
The labor market has remained robust, though it has shown some signs of slowing in recent months.
While the economy beat expectations in August and added 187,000 jobs, the unemployment rate ticked to 3.8%, up from the 3.5% level it has hovered around for months.
On Wednesday, the officials updated their projections for inflation. Fed officials now see inflation, as gauged by the personal consumption expenditures index, at 3.3% by the end of the year, compared to a June projection of 3.2%.
The Fed also changed its forecast for the unemployment rate in the coming months and years. It now predicts the unemployment rate will be at 3.8% by the end of this year, the same level it is at today. That is slightly lower than the Fed’s June estimate that the economy would close the year facing 4.1% unemployment.
The committee members additionally revised their GDP predictions for this year from 1% to 2.1% growth, indicating growing confidence that the economy could avoid some of the worst effects of the rate revisions.
A major factor in the inflation surge is higher oil and gas prices, which have gone up in recent weeks, causing pain for consumers. The national average for regular formulation gasoline is approaching $3.90, the highest seasonal level in more than a decade.
But the higher energy costs don’t just make it more expensive for consumers to fill up their cars — they could feed into increases in the prices of other goods and services as companies are forced to raise prices to make up for the extra spending on energy costs.
The recent gains in inflation are also a blow to President Joe Biden, whose administration has been trying to tout so-called “Bidenomics.” The push included highlighting declines in inflation and labor market gains. Two months of inflation increases have made the messaging more difficult for the president.
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Still, one key positive element in the economy is the country’s GDP growth, which has proven surprisingly durable in the face of the Fed’s tightening.
GDP grew at a 2.1% annual rate in the second quarter of this year after a 2% rate in the first quarter. Furthermore, the Atlanta Federal Reserve’s “GDPNow” tracker predicts the third quarter GDP growth rate will be 4.9%.
