The Federal Reserve announced as scheduled to maintain interest rates unchanged and is expected to raise interest rates again this year

At 2 am Beijing time on September 21, the Federal Reserve announced as scheduled that it would maintain interest rates in the target range of 5.25% to 5.5%. The bank also said that it still expects to raise interest rates again before the end of the year, and the number of interest rate cuts next year will be less than previously expected.

The central bank's forecast, released at the end of its two-day meeting, would end the current rate-hiking cycle if it achieved a final rate increase. If the Fed continues to raise interest rates, it will raise policy a full 12 times since it began tightening in March 2022.

While keeping interest rates on hold is widely expected, there is considerable uncertainty about how the FOMC will proceed next. Judging from Wednesday's statement, the committee appears to be leaning towards a policy of keeping interest rates high for an extended period of time.

The outlook weighed on markets, with the S & P 500 falling immediately after the rate announcement. US stocks continued to slide as Federal Reserve Chairperson Jerome Powell answered questions at a press conference.

"We are in a position where we can carefully decide whether further tightening is needed," Mr. Powell said, stressing that the central bank wanted to make more progress in fighting inflation.

"We want to see solid evidence that we have reached the appropriate level and that we are making progress," he said. "But we need to see more progress to reach that conclusion."

According to the Fed's dot plot, there is still the possibility of one more rate hike this year, followed by two rate cuts in 2024, two fewer than in June. That would keep rates around 5.1%.

Twelve FOMC participants supported another rate hike and seven opposed, one more opponent than at the June meeting. Forecasts for the federal funds rate in 2025 also rose, with a median forecast of 3.9 percent, compared with 3.4 percent previously.

Economic growth expectations are on the rise

In addition to its interest rate forecast, the committee also sharply raised its economic growth forecast for this year, projecting that U.S. gross domestic product (GDP) will grow by 2.1% this year, more than double its June estimate, indicating that the committee does not expect a recession in the near term. The GDP forecast for 2024 was also raised to 1.5%, from 1.1% previously.

Expected inflation also fell, to 3.7 percent, down 0.2 percentage points from June, and the expected unemployment rate, now projected at 3.8 percent, from 4.1 percent.

Some of the changes in the post-meeting statement reflected an adjustment in the economic outlook.

The committee described economic activity as "expanding solidly" and its previous statement as "moderate". It also noted that while "employment growth has slowed in recent months, it remains strong," in contrast to previous language describing a "healthy" employment situation.

In addition to keeping interest rates relatively high, the Fed has continued to reduce its bond holdings, cutting its balance sheet by about $815 billion since June 2022. Instead of reinvesting them, the Fed allows up to $95 billion of earnings to be rolled over from maturing bonds each month.

Moving towards a more balanced perspective

The Fed's actions come at a delicate time for the US economy.

In recent public appearances, Fed officials have signalled a shift in their thinking from a view that it is better to do too much to reduce inflation to a new, more balanced view, in part because of the perceived lag in the effects of higher rates.

There are growing signs that the central bank could achieve a "soft landing", reducing inflation without plunging the economy into a deep recession. However, the future is still far from certain and Federal Reserve officials are cautious about declaring victory too soon.

The US employment picture has been solid, with the 3.8 per cent unemployment rate only slightly higher than a year ago. Job openings have been falling, helping the Fed make progress in addressing the mismatch between supply and demand.

Inflation data also improved, although annual inflation remains well above the Fed's 2 per cent target. The central bank's favourite inflation measure for July showed core inflation at 4.2 per cent, excluding volatile food and energy prices.

Consumers account for about two-thirds of economic activity, and their spending power has been strong, even as savings have dwindled and credit card debt has breached the $1 trillion mark for the first time. A recent survey by the University of Michigan showed that one-year and five-year inflation expectations are at their lowest levels in years.