Cloudy outlook for Fed policy after Wednesday's rate hike

The Federal Reserve raised interest rates as expected Wednesday, but left it wide open as to whether any more rate hikes are coming.

The central bank's interest-rate moves are important for you, as they help determine the cost of any credit-card debt, auto loans, mortgage loans or personal loans that you hold.

The Fed lifted its federal funds rate target to a range of 5.25%-5.5% Wednesday, the highest level in 22 years.

The Fed's goal is to push inflation down to its target of 2%. Consumer prices rose 3% in the 12 months through June, down from 4% in May and a cyclical peak of 9.1% in June 2022.

"Paradoxically, today's Fed meeting was one of the most certain and uncertain of the cycle," Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management, said in a commentary.

"A 0.25 percentage-point rate hike was fully priced in and widely expected by forecasters and investors. However, investors remain divided on whether this marks the last increase in the current tightening campaign."

Change in Fed's Message

Fed Chairman Jerome Powell said in June that central bank policymakers expect they will need to raise rates at least twice by year-end. But he dialed that back Wednesday, saying "we're going to be going meeting-by-meeting" as to whether to increase rates again.

"Looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate," Powell said.

The Fed's policy statement Wednesday didn't offer many clues as to what's coming next. The only significant change from the prior statement was to describe the economy's expansion as "moderate," after calling it "modest" in June.

That helps explain Wednesday's rate increase, but doesn't give much future guidance. Investors already knew that economic growth is likely accelerating a bit. The Atlanta Fed's forecasting model shows annualized growth of 2.4% for the second quarter, up from 2% in the first quarter.

Economist Sees Unchanged Policy

Comerica chief economist Bill Adams said the likeliest outcome is steady Fed policy for the rest of the year.

"If inflation holds on the slower trajectory it has charted over the last few months and wage growth slows in the second half of 2023, the Fed will likely take a pass on raising rates again in the second half of 2023," he wrote in a commentary.

"The odds of this seem pretty good, and Comerica thinks the Fed is more likely to hold rates steady for the next several decisions than to make more hikes."

Still, "it's not a slam dunk," Adams said. "Crude oil prices have ticked up in the last few weeks, and house prices rose more than expected in April and May. If wage growth or inflation surprise to the upside, the Fed could make one more rate hike before the end of this year."