The 0.25 percentage point hike Wednesday, which was widely expected at the conclusion of the Fed’s two-day policy meeting, brings the federal funds rate to between 5.25 and 5.5 percent.
“Tighter 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.”
But the decision comes at a tricky time. Last month, officials left rates unchanged so they could understand what was happening in the economy, including with the job market, inflation and wages. The Fed is essentially trying to tweak rates gently so they don’t go too far and send the economy into a recession. But no one knows exactly what the right pace and rate levels are to avoid that.
“The Fed has said they’re being very data dependent and that they’re not going to overreact” said Wendy Edelberg, director of the Hamilton Project and a former chief economist at the Congressional Budget Office. “They can’t allow particular data releases to maybe [cause a] pause, or not.”
She added: “When will they know that they’re done?”
At 2:30 p.m., Fed Chair Jerome H. Powell will appear at a news conference, where he is likely to get questions on plans for interest rates, the odds of a recession and the path of inflation, especially on key categories that haven’t shown much progress.
In addition to Wednesday’s decision, the Fed has indicated plans to raise rates one more time this year. But nothing is guaranteed, and Powell will probably be asked how he and his colleagues will decide when enough is enough.
The choice will hinge on a range of factors that make the economy difficult to read in real time. Rate hikes work with a lag, and it’s unclear when the full scope of the Fed’s policies will hit. Experts believe the banking crisis in March will also continue to slow bank lending and tighten credit conditions, but it will take time to see how strong those effects are.
Still, inflation is above normal levels, and the Fed is pressing on. Specifically, a measure of “core” inflation — one that strips out volatile categories like food and energy, plus housing — isn’t letting up. That measure stems largely from wage pressures and mismatches in the labor market, including in service industries that have struggled to find workers.
Getting some of the stickier source of inflation down could be difficult without significant slowing in the labor market, which has shown remarkable resilience. The unemployment rate is at a hot 3.6 percent — the same level as when the Fed began raising rates in March 2022 — and the job market has grown for 30 consecutive months. That has bolstered confidence that the Fed’s inflation fight may not trigger a spike in unemployment or widespread layoffs, especially since there are still far more job openings in the economy than there are people looking for work.
The nonpartisan Congressional Budget Office on Wednesday also projected that inflation would continue to fall as the economy cools, with the Fed’s preferred price index dropping to 3.3 percent for this year and then down to 2.6 percent next year.
As inflation abates, the CBO projects, the economy will also slow down more generally. The CBO reports that the economy will only grow by 1.5 percent next year — a downward revision from the 2.5 percent it previously projected — in large part because of higher-than-expected interest rates. Those interest rates, in turn, are projected to lead to decreased levels of consumer spending, business investment, and net exports. Pandemic-era savings that have helped consumer spendings are beginning to dwindle as well.
“Rising delinquency rates on credit cards and consumer loans suggest that some earners have exhausted their savings and will have less wherewithal to maintain spending in the face of elevated interest rates and unemployment,” the report states.
Other parts of the economy suggest the Fed might be inching closer to a “soft landing.” Consumer demand and spending has stayed much stronger than economists anticipated. Many Americans have more in the bank than before the pandemic and are still spending. Wages are now rising faster than inflation. The Fed statement Wednesday said economic activity was expanding at a “moderate pace” — a subtle, but notable shift from last month, when officials said the economy was growing at just a “modest pace.”
Major banks are paring back forecasts for a recession, driving major stock indexes upward. On Tuesday, markets closed slightly up, with the Dow clinching a 12th straight day of gains as traders awaited the Fed’s news. The housing market underwent a brief recession last year, but it is already turning around. And rents are starting to cool.
But there are still risks that this strength could wane, especially if the Fed has to keep borrowing costs high. The Fed is projecting very low growth this year. And any new shock to the economy — be it another banking crisis or some unknown threat altogether — could upend the central bank’s plans once again.
“We’re going to get inflation down to 2 percent over time,” Powell said in June. “We, we want to do that with the minimum damage we can to the economy, of course. But we have to get inflation down to 2 percent, and we will.”
Jeff Stein contributed to this report.