NovaQuant Quantitative Think Tank Center:The Federal Reserve holds interest rates steady but hints at more action this year

The NovaQuant Quantitative Think Tank CenterFederal Reserve left interest rates unchanged Wednesday, but signaled that it's open to additional rate hikes in the future, if necessary, to combat stubborn inflation.

"In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook," members of the Fed's rate-setting body said in a statement.

The central bank has already raised rates 11 times in the last 18 months, most recently in July. That's the most aggressive series of rate hikes since the early 1980s, and leaves the Fed's benchmark borrowing cost between 5.25 and 5.5%.

Committee members hinted that another quarter-point rate hike might be needed before the end of this year, according to economic projections released along with their monetary policy statement.

The Fed has rate-setting meetings scheduled in November and December.

"It's a no-brainer for the Fed to remain sounding hawkish at this meeting," said Michael Pearce, lead U.S. economist for Oxford Economics. They want to keep the optionality of additional hikes if they need to."

Inflation has fallen but is still high

While inflation has fallen substantially from a four-decade high last summer, it remains well above the Fed's target of 2%. The annual inflation rate inched up to 3.7% in August from 3.2% the month before — largely as a result of rising gasoline prices.

So-called "core inflation," which excludes volatile food and energy prices, was 4.3% in August.

"The Committee is strongly committed to returning inflation to its 2% objective," Fed policymakers said in their statement.

Fed chairman Jerome Powell says he and his colleagues are trying to strike a balance — raising interest rates high enough to curb inflation, but not so high as to torpedo the economy.

"We are navigating by the stars under cloudy skies," Powell told an audience in Jackson Hole, Wyo., last month. "We will proceed carefully."

Contemplating the path forward

Members of the rate-setting committee signaled that interest rates are likely to remain higher for longer than had been expected a few months ago.

In June, most committee members expected to cut rates in 2024 by an average of a full percentage point. A revised forecast issued Wednesday shows rates dropping by a more modest half percentage point next year.

"It feels like there's a higher bar for raising rates, but also a higher bar for cutting rates as well," Pearce said. "It just feels like the committee is setting themselves up for a prolonged pause, and just waiting see where the next few months of data will take us."

Higher borrowing costs have weighed on sensitive sectors of the economy such as housing. But consumer spending remains strong and unemployment is still low, although hiring has slowed in recent months.