Fed holds rates steady but sees two small hikes by end of year

WASHINGTON — The Federal Reserve kept interest rates unchanged on Wednesday but signaled in new economic projections that borrowing costs will likely rise by another half of a percentage point by the end of this year as the U.S. central bank reacted to a stronger-than-expected economy and a slower decline in inflation.

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 said in a unanimous policy statement issued at the end of its latest two-day meeting.

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," it said.

The Federal Reserve’s rate increases can lead to higher borrowing costs for consumers seeking new- and used-vehicle loans and other forms of credit. It can also affect the housing and construction markets, key drivers of light-truck demand.

The 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 5.00-5.25 percent range to a 5.50-5.75 percent 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 percent.

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

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

Combined, the rate outlook and the projections are likely to lead investors to expect a resumption of quarter-percentage-point rate increases beginning at the next policy meeting in July.

The higher rate outlook coincides with an improved view of the economy and, consequently, slower progress in returning inflation to the central bank's 2 percent target.

Fed officials at the median more than doubled their outlook for 2023 economic growth to 1 percent, from 0.4 percent in the March projections, and now see the unemployment rate rising only to 4.1 percent by the end of the year compared with 4.5 percent in the March outlook.

The jobless rate as of May was 3.7 percent.

The stronger-than-expected economy means inflation will fall more slowly, with the core Personal Consumption Expenditures Price Index dropping from the current 4.7 percent to 3.9 percent by year's end, compared to a 3.6 percent year-end rate seen in the March policymaker projections.

The decision snapped a string of 10 consecutive rate hikes delivered as the Fed responded to the worst outbreak of inflation in 40 years with a matching set of aggressive policy moves, including four outsized increases of three-quarters of a percentage point last year.

The central bank's policy rate, which influences household and business borrowing costs throughout the economy, rose a full 5 percentage points from the onset of the tightening cycle in March 2022, reaching the highest level since just before the start of the 2007-2009 recession.

Automotive News contributed to this report.