Fed holds interest rates steady, says one more hike likely this year

The Federal Reserve held interest rates steady on Wednesday for the second consecutive meeting — but signaled another hike is possible before the year’s end as inflation remains well above its target.

As of the September policy meeting, central bankers have said they still felt one more rate hike would be necessary, which would advance the benchmark federal funds rate beyond its current 22-year high, between 5.25% and 5.5%.

“Recent indicators suggest that economic activity expanded at a strong pace in the third quarter,” the Fed said Wednesday in a statement that was minimally changed from the previous meeting, when the Fed noted the US economy has been expanding at a “solid” pace.

The Fed’s statement also noted that job gains “have moderated since earlier in the year but remain strong.”

Last month, the federal government said the Consumer Price Index in September rose 3.7% — down sharply from its peak of 9.1% in June 2022, but still well above the Fed’s target rate of 2% inflation.

In the wake of the pause, the Dow Jones Industrial Average gained 221 points, or 0.7%, while the S&P 500 rose 1.1%. The tech-dominant Nasdaq index, which dropped nearly 2% in early trading, rebounded with a 1.6% gain.

During Fed Chair Jerome Powell’s closely-watched press conference following the central bank’s release, he opened with: “Without price stability the economy does not work for anyone.”

He also noted that the economy is expanding “well above earlier expectations.”

Officials have been trying to balance two risks. They don’t want to overdo rate rises to avoid causing an unnecessarily severe downturn.

They also don’t want to allow inflation to reaccelerate or to settle at levels well above their 2% target.

“We’re getting to a place where the risks are closer to being in balance,” Powell said.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance called the Fed’s move on Wednesday “nothing dramatic.”

“The statement leans to the dovish side,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The fact that they left rates unchanged for the second time in a row suggests the Fed might leave rates unchanged in December. And if they do, that means the Fed is done.”

An additional rate hike before the new year appears imminent given the 12 Fed officials that said at the September meeting that they would support one more rate hike before the end of 2023.

Just seven would prefer to maintain the policy stance, Powell said. Economists are also forecasting rates to peak between 5.5% and 5.75% by year’s end, which would mark one more quarter-point rise.

Meanwhile, consumer spending has persevered despite the core personal consumption expenditures price index (PCE) — which excludes food and energy costs — rising by 0.3% last month.

While core prices kept climbing, so did inflation-adjusted consumer spending, which rose 0.4% in September, according to federal data.

But Powell has also said growth needs to slow — and if it doesn’t, it means the Fed’s policy rate will need to move higher.

“It’s a good thing that the economy’s strong. It’s a good thing that the economy has been able to hold up under the tightening that we’ve done. It’s a good thing that the labor market’s strong,” Powell said at his press conference following the end of the Sept. 19 to Sept. 20 policy meeting.

But “if the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2%. Because we will get back to 2%.”

With Post wires