Fed Holds Interest Rates Steady and Pledges to Proceed Carefully

The Federal Reserve left interest rates unchanged on Wednesday while keeping alive the possibility of a future increase, striking a cautious stance as rapid inflation retreats but is not yet vanquished.

Rates have been on hold in a range of 5.25 to 5.5 percent since July, up from near-zero as recently as March 2022. Policymakers think that borrowing costs are high enough to achieve their goal of curbing economic growth if they are kept at this level over time.

By cooling demand, the Fed is hoping to prod companies to raise prices less quickly. While the economy has held up so far — growth was unusually strong over the summer — inflation has come down since 2022. Overall price increases decelerated to 3.4 percent as of September, from more than 7 percent at their peak.

Fed policymakers are now trying to wrestle inflation the rest of the way back to 2 percent. The combination of economic resilience and moderating inflation has given officials hope that they might be able to slow growth gradually and relatively painlessly in a rare “soft landing.” At the same time, the economy’s surprising endurance is forcing the Fed to question whether it has done enough to tamp down demand and price increases.

The major question facing Fed officials is whether they will need to make one final rate increase in the coming months, a possibility they left open on Wednesday.

“The full effects of our tightening have yet to be felt,” Jerome H. Powell, the Fed chair, said at a news conference after the decision. “Given how far we have come, along with the uncertainties and risks we face, the committee is proceeding carefully.”

Mr. Powell said officials would base decisions about the possibility and extent of additional policy firming — and how long rates will need to stay high — on economic data and how various risks to the outlook shaped up.

Stock prices in the S&P 500 index rose as Mr. Powell spoke, and odds of further rate increases declined, suggesting that investors took his comments as a sign that interest rates were probably at their peak. But Diane Swonk, chief economist at KPMG, said she thought markets were getting ahead of themselves.

“They are not declaring victory,” she said, explaining that while she did not expect the Fed to move rates in December, an early-2024 move seemed possible. “They are hesitant to say, ‘We’re done.’”

Other analysts suggested that by not pushing back on the market’s expectation that the Fed was done raising interest rates, Mr. Powell was essentially endorsing that view, barring an unexpected surprise.

At the Fed’s previous meeting, in September, policymakers had forecast that one more quarter-point increase in rates would probably be appropriate before the end of 2023. But officials did not release updated economic projections on Wednesday — they are scheduled to do so after the Fed’s Dec. 12-13 meeting — and conditions have changed since their last assessment.

That is because longer-term interest rates in markets have jumped higher. While the Fed sets short-term borrowing costs, longer-term rates adjust at more of a delay and for a variety of reasons.

The recent rise has made everything from mortgages to business loans more expensive, which might help cool the economy. The change may make it less necessary for Fed officials to raise rates further.

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” the Fed said in its statement Wednesday, newly pointing to financial conditions as a restraint on growth.

“It’s their way of saying that higher interest rates matter,” Gennadiy Goldberg, a rates strategist at TD Securities, said of the line. “Interest rates are doing some of the Fed’s work for them.”

Mr. Powell made it clear that the Fed was closely watching higher market interest rates — particularly to see whether the jump was sustained, and to what extent it squeezed consumers and businesses.

But Mr. Powell said the Fed’s staff economists were not predicting an imminent recession, which suggests that they do not see the higher borrowing costs hurting the economy too severely.

And he said policymakers were still focused on whether interest rates were high enough to ensure that inflation would cool fully, given recent evidence of continued economic strength.

“We are not confident yet that we have achieved such a stance,” Mr. Powell said.

While the Fed’s moves have held back some parts of the economy, including sales of existing homes, the labor market continues to chug along. Hiring is still quicker than before the pandemic. Wage gains have cooled, but are also faster than pre-2020.

As Americans win jobs and raises, they have continued to open their wallets. Spending climbed faster than economists expected in September, and growth overall has been much faster than what most forecasters would have expected a year and half into the Fed’s campaign to cool it.

That strength could become a problem for central bankers, should it persist. If consumers remain ravenous for goods and services, companies may continue raising prices, making it more difficult to eliminate what is left of rapid inflation.

At the same time, Fed officials do not want to brake too hard, which could unnecessarily cause a recession. Policy changes often act with a lag, and it can take months for the cumulative effects of interest rate increases to fully bite.

“Everyone has been very gratified to see that we’ve been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that is very typical” with interest rate increases, Mr. Powell said. “The same is true of growth.”

But he also made it clear that the Fed still thought a slowdown in the job market and overall growth were likely to prove necessary. Healing supply chains and a fresh supply of workers have helped to bring the economy into balance so far, but those forces may not be enough to bring inflation fully back to normal, he said.

“What we do with demand is still going to be important,” he said, later adding that “slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.”