Fed keeps rates at 22-year high as inflation retreats

The Federal Reserve held interest rates steady Wednesday after a year of remarkable progress in its fight against inflation, signaling their rate hike crusade may be coming to an end.

“We are likely at or near the peak rate for this cycle,” Fed Chair Jerome Powell said at a press conference following the announcement.

The Federal Open Market Committee (FOMC) — the panel of Fed officials responsible for monetary policy — kept its baseline interest rate at a range of 5.25 to 5.5 percent following its final meeting of the year. The central bank raised rates to that level in July and has now kept them there after three consecutive meetings.

Financial and economic experts expected the Fed to maintain its baseline interest rate range as inflation continues to fall but remains above the bank’s target of 2 percent annual price growth.

“Inflation has eased from its highs and this has come without a significant increase in unemployment. That’s very good news. But inflation is still too high,” Powell said, adding “the path forward is uncertain.”

Consumer prices were up 3.1 percent annually as of November, according to Labor Department data, well below the 9.1 percent annual inflation rate clocked in June of last year.

The economy has also fared far better than many forecasters expected and avoided a recession seen by many experts as inevitable.

“A very high proportion of forecasters were expecting very weak growth or a recession. Not only did that not happen, we actually had a very strong year,” Powell said.

Just 3.7 percent of American workers were unemployed in November, according to Labor Department data, in line with pre-pandemic numbers.

But “it is far too early to declare victory,” Powell said.

With inflation still above target and the economy holding strong, the Fed is hoping to maintain progress by keeping rates at a 22-year high. Higher interest rates tend to slow the economy and reduce spending on goods and services that could drive up prices.

The Fed, however, is also facing calls to cut interest rates next year before the weight of high borrowing costs takes a steeper toll on the economy.

“We’re aware of the risk that we would hang on too long” before making interest rate cuts, Powell said.

Fed officials have said little about their plans for 2024, and leaders have been wary to declare victory against inflation.

Even so, all but three FOMC members expect the Fed to cut rates at least twice next year, according to economic projections released Wednesday.

Powell has also warned that it is too soon to know if inflation is on track to return to pre-pandemic levels and would not rule out future rate hikes.

The committee’s outlook on gross domestic product came in at 2.6 percent, up significantly from its September projection of 2.1 percent following surprisingly hot economic growth. But the members expect that growth to slow to 1.4 percent in 2024, in line with their earlier projections.

Economic growth and unemployment are two key metrics the Fed will be watching as they walk the line between cooling the economy without triggering a recession. While employment has been below 4 percent for the longest stretch in decades, the committee expects that to change in 2024, ticking up to 4.1 percent.

One data point the Fed won’t be factoring in as it weighs its next move: the presidential election.

When asked if the Fed would front load rate cuts during an election year, Powell said, “We don’t think about political events, we don’t think about politics, we think about what’s the right thing to do for the economy.”

Updated at 4:08 p.m.