The Federal Reserve left interest rates unchanged Wednesday, as policymakers grapple with how much more pressure to keep on an economy that has largely shrugged off the central bank’s moves to slow it down.
Faced with soaring inflation as economic growth boomeranged back from the coronavirus pandemic, the central bank sprinted to hoist interest rates starting in March 2022. Policymakers brought borrowing costs to the highest level in 22 years, with the Fed’s benchmark interest rate now falling between 5.25 and 5.5% .
Looking ahead, Fed officials left the door open to another possible rate hike, depending on what happens with inflation, economic activity, financial conditions and the cumulative toll of the central bank’s long campaign to raise interest rates.
“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” according to a Fed statement. “The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
The rate announcement came at the conclusion of the Fed’s their two-day policy meeting.
Normally, steep rates would zap the economy or cause a recession, as people pull back on spending and businesses lay workers off. But the 2023 economy is showing the opposite, buoyed by a tight labor market and the flush pocketbooks of consumers nationwide.
What’s yet to be sorted out is how the Fed will respond.
“There’s a grand experiment in monetary policy that the world’s central banks are unwinding,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “And since we’ve never seen this before, there’s a bit of humility of how this all plays out. Or a lot.”
Up to now, Fed leaders have left the door open for another quarter-point hike before the end of the year. But policymakers will only meet one more time before 2024, and it’s unclear what would push them to raise rates again after pausing for multiple meetings.
The growing message instead is that rather than pushing rates up more, Fed leaders will hold rates at elevated levels for longer than they previously expected – and as long as it takes to get inflation down.
Part of the reason Fed officials have been hesitant to hike again is because of a recent run-up in government bond yields, a crucial benchmark that supports borrowing rates worldwide. Some Fed officials have suggested that higher yields effectively do the job of one more rate hike by making financial conditions tighter. But financial markets, which have mostly reacted negatively to higher rates, will still be on alert for any hints about future rate decisions, including potential cuts in 2024.
Ultimately, everything will depend on how the economy continues to evolve and whether policymakers turn out to be right.
So far, robust spending, especially from wealthy Americans, has kept the economy roaring far beyond expectations. Undeterred by high inflation, many households are shelling out on concert tickets, high-end vacations and new cars. High costs for the basics – groceries, gas, rent – are still falling hard on lower-income families with less room to stretch their budgets. But data released last week showed a fifth consecutive quarter of growth, with the economy expanding at an annualized rate of 4.9 percent from July to September, the strongest pace since 2021.
The job market hasn’t cratered, either. In past remarks, Fed Chair Jerome H. Powell pointed to some signs of slowing, like fewer job openings and wages that are increasing at a more moderate pace. But the unemployment rate is still at a hot 3.8 percent, and employers have added jobs for 33 months straight.
Put together, the economic reality hardly matches what many experts and Fed officials saw coming.
“If you think back a year, many forecasts called for the U.S. economy to be in recession this year,” Powell said in remarks before the Economic Club of New York last month. “Not only has that not happened – growth is running above its longer-run trend. So that’s been a surprise.”
Part of that surprise stems from the fact that households and businesses just aren’t responding to higher interest rates in typical ways. The housing market, for example, is supposed to be especially sensitive to interest rates, as high borrowing costs kick mortgage rates way up. The average for a 30-year fixed-rate mortgage is now 7.79 percent, up more than 1 percentage point in 2023, according to Freddie Mac.
But the last year’s downturn in the housing market didn’t last long. And home prices are even on the upswing again. Prices rose 2.6 percent in August compared with the year before, according to data released Tuesday by the closely watched S&P CoreLogic Case-Shiller Home Price. Thirteen of the country’s 20 major metro markets also reported price increases in August compared with July.
“It really is a story of much stronger demand,” Powell said at the Economic Club on Oct. 19. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”