Federal Reserve pauses interest rate hikes as inflation shows signs of cooling

The Federal Reserve on Wednesday finally hit the brakes on hiking rates after 10 straight increases, but signaled the pause could be temporary if the economy and inflation don’t continue to cool.

The benchmark interest rate remained at 5.25 — a 16-year high –.but the central bankers cautioned the pause may be brief — more of a “skip” — with another rate hike likely as soon as their next meeting in late July.

In an effort to balance risks to the economy with a still unresolved fight to control inflation, “holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the rate-setting Federal Open Market Committee (FOMC) said in a unanimous policy statement issued at the end of its latest two-day meeting.

The Fed’s dot plot hints that another two, 25-basis-point rate hikes could happen before the end of the year, bringing the benchmark rate to between 5.5% and 5.75%, according to The Wall Street Journal.

Further rate increases would “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the FMOC said.

Wall Street didn’t cheer the pause, with the Dow falling 250 points shortly after the 2 pm announcement before closing down 232.79, or 0.7%.

Speaking after the release of the Fed statement, Fed Chairman Jerome Powell said, “we’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”

Powell added nearly all Fed officials expect more rate rises this year, and he noted that even as officials have not decided what they will do with rates at coming meetings, the July FOMC gathering is a “live meeting” which could bring another rate increase.

The Fed’s new projections, adding a hawkish tilt to Wednesday’s interest rate decision, show policymakers at the median see the benchmark overnight interest rate rising from the current to a 5.50%-5.75% range by the end of the year.

Half of the 18 Fed officials penciled in their “dot” at that level, with three seeing the policy rate moving even higher – including one official who sees it rising above 6%.

Two Fed officials see rates staying where they are, and four see a single additional quarter-percentage-point increase as likely appropriate.

Policymakers, however, anticipate 100 basis points of rate cuts in 2024, alongside fast-falling inflation.

The decision to pause comes the day after the Bureau of Labor Statistics reported that the Consumer Price Index — a closely-monitored measure of inflation that tracks changes in the costs of everyday goods and services — rose 4% in May versus a year earlier.

The latest inflation figures were a step down from April’s 4.9% increase and marks the smallest monthly increase in more than two years.

Last June, inflation had peaked at 9.1%.

Banks have been slowing their lending — and demand for loans has fallen — as interest rates have risen.

Some analysts have expressed concern that the collapse of three large banks last spring could cause nervous lenders to sharply tighten their loan qualifications and worsen the drop in lending.

Economists at Goldman Sachs have estimated, though, that such damage will be modest.

The CPI’s cooling inflation figures for May reflected sharply lower gas prices and slowdown in food inflation, though housing and used car costs continued to run high.

Excluding volatile food and energy costs, uncomfortably high inflation persisted: So-called core prices rose 5.3% year over year, down from 5.5% in April but far above the Fed’s 2% annual target.

At the same time, the gradual but steady decline in overall inflation suggests that the Fed’s rate hikes have had some success.

Last month, the Fed hiked interest rates by another quarter percentage point — bringing the benchmark funds rate from 5% to 5.25%, a 16-year high.

Tuesday’s inflation data showed that most of the rise in core prices reflected high rents and used car prices.

Those costs are expected to ease later this year as the Fed works to further cool the US economy.