The Federal Reserve decided to keep interest rates the same for just the second time since beginning its current hiking cycle aimed at curbing inflation last year, also releasing its projections for where it expects the federal funds rate to land, providing some unwelcome news for investors hoping for rates to come down sooner rather than later.
Federal Reserve chair Jerome Powell speaks to reporters in July.
The Fed will hold rates steady at the 22-year high of 5.25% to 5.5% as widely expected, the central bank announced Wednesday afternoon following the conclusion of the two-day meeting of its policy-setting Federal Open Markets Committee.
The statement accompanying the release noted the Fed is “prepared to adjust the stance of monetary policy.”
The Fed’s quarterly economic forecast Wednesday revealed where policymakers expect interest rates to go.
Fed officials expect rates to sit at a median of 5.6% by year’s end, the same as its projection of 5.6% in June’s forecast, 5.1% by the end of 2024 versus 4.6% in June and 3.9% by the end of 2025 from 3.1% in June, maintaining its 2.5% long-term estimate.
Stocks slipped following the Fed report, paring earlier gains and sending the S&P 500 to a modest decline for the day.
The Fed’s 2024 federal funds rate projection is perhaps the “most important forecast” for investors, a Bank of America group led by economist Michael Gapen wrote Monday, predicting the Fed to up its 2024 estimate to 4.875%. Prior to the Fed’s Wednesday release, the futures market priced in a federal funds rate of 4.5% to 4.75% as the most likely scenario for the end of 2024, according to CME Group data. The next rate cut will be the first since March 2020.
Since last March, Fed chairman Jerome Powell and company hiked the federal funds rate 11 times in an effort to stem inflation by slowing the economy, bringing it up from the near-zero levels they hovered at beginning in early 2020. The federal funds rate only technically determines the interest rate at which banks can lend to each other but heavily influences the borrowing costs across the economy, such as mortgages, car loans and business loans. The rise in rates came as the Fed sought to tackle soaring inflation. The consumer price index peaked at 9.1% last June but came in at a far more modest 3.7% last month, still well above the Fed’s 2% long-term target, as the central bank’s battle on inflation bears fruit but remains far from over. The higher-rate environment has stifled stocks as it cuts into corporate bottom lines as borrowing costs mount; the S&P 500 is down about 7% since the end of 2021 when rates were 0% to 0.25%.