Fed leaves rates unchanged, sees two small hikes by end of 2023

Following a meeting of the Fed's policy-making Open Market Committee (FOMC), Powell said risks of inflation remain.

Speaking after the release of the Fed statement, Fed Chairman Jerome Powell noted that as the Fed has paused rates, "we’ve covered a lot of ground and the full effects of our tightening have yet to be felt."

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 the meeting allows the committee to assess additional information and its implications for monetary policy," the rate-setting FOMC said in a unanimous policy statement issued at the end of its latest two-day meeting.

The Federal Reserve kept interest rates unchanged but signalled 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 US central bank reacted to a stronger-than-expected economy and a slower decline in inflation.

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.

Wednesday's decision to keep rates unchanged 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.

'I don't think we have any surprises here' - analyst on Fed's rate pause

"I don't think we have any surprises here today. By this morning and yesterday, it was pretty clear that the Fed would pause," said Liz Miller, president at Summit Place Financial Advisors.

"Clearly, the message was, 'We want to watch more data before we make the next move,'" she added.

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 5.00%-5.25% range to a 5.50%-5.75% range by the end of the year. Half of the 18 Fed officials pencilled 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.

“I think the way we saw the stock market take a dive and come back quickly was very positive for the markets. There really wasn't a big surprise today," Miller said.

US stocks end mixed after Fed signals more rate hikes to come

US stocks ended mixed on Wednesday after the Fed kept US interest rates unchanged. 

Trading was choppy after the rate-setting FOMC reacted to a stronger-than-expected economy and a slower decline in inflation.

Earlier on Wednesday, a bigger-than-expected drop in US producer prices in May due to a decline in the costs of energy goods and food signalled that inflation was cooling. Data a day earlier showed consumer prices moderated last month.

Traders now see a 63% chance the central bank will raise interest rates in July, up from 60% earlier on Wednesday, according to the CME Fedwatch tool.

The S&P 500 gained 3.58 points, or 0.08%, to end at 4,372.59 points, while the Nasdaq Composite gained 53.16 points, or 0.39%, to 13,626.48. The Dow Jones Industrial Average fell 232.79 points, or 0.68%, to 33,979.33.