On September 21, the Federal Reserve held back and released more interest rate hike signals, causing the dollar to rise sharply and gold to plunge

SEPTEMBER 21 (Reuters) - The Federal Reserve left interest rates unchanged on Wednesday (Sept. 20), but hinted that it may raise rates again if further measures are needed to curb inflation.

The Federal Reserve kept interest rates unchanged on Wednesday (September 20), but hinted that officials could raise rates again if further measures are needed to curb inflation.

The Federal Reserve maintained its base rate at 5.25% -5.5%, but kept its rate forecast at 5.5-5% this year, implying another rate hike this year.

Twelve members expect another rate hike this year, while seven want to keep rates at current levels.

Officials are now expected to cut rates by 0.5 per cent from their expected peak range of 5.5-5.75 per cent, implying a longer period of higher rates, compared with a full percentage point cut they had planned as early as June.

The Federal Reserve said that future rate hikes will depend on the impact of previous rate hikes on the economy, the lag effect and economic development. #Fed policy shift #

Wednesday's statement left room for further rate increases, with the Fed writing: "In determining the appropriate level of further policy tightening... the Committee will consider the cumulative degree of tightening of monetary policy, the degree of lag in the effects of monetary policy on economic activity and inflation, and economic and financial developments."

The FOMC statement shows that 12 officials expect another rate hike this year, while seven expect it to remain unchanged.

The Federal Reserve's dot plot shows that the median forecast for the federal funds rate at the end of 2023 to 2024 is 5.6% and 5.1%, respectively, compared with 5.6% and 4.6% in June; the median forecast for the rate in 2026 is 2.9%, higher than the long-term forecast of 2.5%.

In their statement, Fed officials said they still considered inflation to be "high" and noted that they remained "highly concerned" about inflation risks. However, officials downgraded their inflation expectations, predicting a drop to 3.7 per cent by the end of the year from 3.9 per cent forecast in June. Officials expect inflation to fall to 2.6 per cent next year, in line with their June forecast.

The Fed, which acknowledges that job growth has slowed but still thinks it will perform strongly, now expects the unemployment rate to fall to 3.8 per cent this year from a previous forecast of 4.1 per cent and remain there until 2025.

The GDP forecast for this year has been raised to 2.1% from the previous 1%. The expected growth rate for next year has also been raised to 1.5% from 1.1%.

Federal Reserve officials are exercising caution as they consider future actions and need more time to digest the cooling inflation data, weighing the risks of too much inflation against the risks of oversuppressing the economy.

The Fed's preferred measure of inflation, the so-called "core" PCE, which excludes food and energy costs, rose 4.2 per cent in July from a year earlier, up from 4.1 per cent in June but down from a range of 4.5-4.6 per cent in the first half of the year.

Another measure of inflation - the "core" consumer price index (CPI) - rose 4.3% in August, down from 4.7% in July and the smallest gain since October 2021.

The interest rate decision was passed unanimously.

After the announcement of the interest rate decision, the Federal Reserve swap market reduced the likelihood of a rate cut in 2024, with swaps indicating that traders delayed the first rate cut until next September.

US 2-year Treasury yields rose to 5.131 per cent, their highest level since 2007. US 10-year yields surged to 4.357 per cent after the Federal Reserve statement. The inversion of the yield curve on US 2-year and 10-year Treasuries deepened to 79 basis points.

The dollar index DXY widened its short-term gain to 47 points at 105.20. The euro widened its short-term decline against the dollar EUR/USD to 54 points at 1.0673. The dollar widened its short-term gain against the yen USD/JPY to 54 points at 148.11.

After the Federal Reserve's interest rate decision was announced, spot gold fell by $6 to $1,940.31 per ounce.

The S & P 500 Index fell 6 points, or 0.1 percent, to 4,437, while the Nasdaq Composite fell 52 points, or 0.4 percent, to 13,622. The 10-year Treasury yield fell 2 basis points to 4.344 percent after paring earlier losses.

"Fed mouthpiece" Nick Timiraos pointed out that the median shows that two rate cuts are expected in 2024. Although estimates of long-term unemployment have not risen, the median expectation of FOMC participants is that inflation will return to target in 2026, unemployment will remain at long-term levels, and the economy will maintain trend expansion. The nominal federal funds rate is just below 3%.