Fed pauses rate hikes but forecasts more increases as inflation remains too high

The Federal Reserve decided Wednesday to keep interest rates at their current level for now, but forecast at least two more rate hikes in the coming months to keep fighting inflation.

The decision keeps the Fed’s benchmark rate in the range of 5% to 5.25%, its highest level in 16 years. The central bank’s open-market committee said the economy “has continued to expand at a modest pace.”

“Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” the Fed said in its statement.

But the statement said most Fed officials expect rates to reach 5.6% by the end of the year — a half-percentage point higher than their March prediction, suggesting more hikes are coming.

“We understand the hardship that high inflation is causing, and we remain strongly committed to bring inflation back down to our 2% goal,” Fed Chairman Jerome H. Powell said at a news conference. “I don’t think the story has really changed.” 

Stocks were mixed after the announcement. The Dow Jones Industrial Average lost 232 points, or 0.6%, to close at 33,979. But the Nasdaq and S&P 500 rose slightly.

Inflation rose in May at an annual rate of 4%, the lowest rate in two years. The Fed, which aims for an inflation rate of 2%, has imposed a series of 10 interest-rate hikes since March 2022 to cool inflation that hit a high of 9.1% in June 2022.

One reason why the officials may be predicting additional rate increases is that they foresee a modestly healthier economy and more persistent inflation that might require higher rates to cool.

Their updated forecasts show them predicting economic growth of 1% for 2023, an upgrade from their meager 0.4% forecast in March. And the officials expect “core” inflation, which excludes volatile food and energy prices, to be at 3.9% by year’s end, higher than they expected three months ago.

The Fed’s aggressive streak of rate increases — and the resulting costlier mortgages, auto loans, credit cards and business borrowing — has been intended to slow spending and defeat the worst bout of inflation in four decades. Mortgage rates have surged, and average credit card rates have surpassed 20% to a record high.

Wholesale prices in the U.S. dropped 0.3% from April to May, another sign that inflationary pressures continue to ease in the face of repeated interest rate hikes by the Fed.

The Labor Department’s producer price index — which measures inflation before it reaches consumers — rose 1.1% last month from May 2022, it said Wednesday, the smallest year-over-year gain since December 2020.

On a month-to-month basis, overall producer prices have now dropped three of the last four months. In May, wholesale inflation was pulled down by a 13.8% drop in gasoline prices.

Excluding volatile food and energy prices, so-called core wholesale inflation was up 0.2% last from April and 2.8% from a year earlier, the mildest gain since February 2021.

 • This article is based in part on wire-service reports.