The Federal Reserve left its benchmark interest-rate target unchanged at 5.25% to 5.50% on Wednesday, but new projections showed most policymakers still expect another increase could be appropriate this year and substantially fewer rate cuts in 2024 than they anticipated three months ago.

The unanimous Federal Open Market Committee statement said economic activity has been expanding at a solid pace, job gains have slowed but remain strong and inflation remains elevated. After raising rates by 5.25 percentage points since March 2022, the committee chose to hold steady for the second time in three meetings while continuing to reduce the Federal Reserve’s securities holdings.

The pause did not signal that the tightening cycle is over

The strongest signal came from the Fed’s new Summary of Economic Projections. The median participant still sees the federal funds rate at 5.6% at the end of 2023, a level consistent with one additional quarter-point increase from the current midpoint. More notably, the median projection for the end of 2024 rose to 5.1%, compared with 4.6% in June, implying that policymakers expect rates to remain higher for longer even if inflation continues to ease.

The projections also became more optimistic about economic growth. The median forecast for real gross domestic product growth in 2023 increased sharply from the June estimate, while projected unemployment remained relatively low. That combination suggests policymakers see a greater possibility that the economy can withstand restrictive monetary policy without entering a severe downturn.

The Federal Reserve’s release of the projections emphasizes that they are individual participants’ assessments rather than a committee commitment. The path can change as new data arrive. Still, markets and borrowers closely watch the median because it provides the clearest numerical indication of how policymakers collectively see the balance between inflation risk and economic weakness.

Inflation has cooled substantially, but recent data complicate the picture

Inflation is well below its 2022 peak, but the August consumer-price report showed why the Fed is reluctant to declare victory. The Bureau of Labor Statistics reported that the Consumer Price Index rose 0.6% in August and 3.7% over 12 months. Gasoline accounted for more than half of the monthly increase, while shelter costs continued to rise. The index excluding food and energy increased 0.3% for the month.

The Fed focuses more heavily on the Personal Consumption Expenditures price index. The most recent Bureau of Economic Analysis report, covering July, showed both headline and core PCE prices rising 0.2% for the month. Those figures are consistent with meaningful disinflation, but inflation remains above the Federal Reserve’s 2% objective.

Energy prices are a particular near-term uncertainty. A sustained increase in gasoline can lift headline inflation and household expectations even if underlying price pressures continue to moderate. At the same time, the Fed must distinguish temporary energy movements from persistent inflation in labor-intensive services and housing-related categories.

A resilient labor market gives the Fed room to wait

The labor market has cooled from the extraordinary conditions of 2021 and 2022 without collapsing. An August employment report showed payrolls rising by 187,000, while the unemployment rate moved up to 3.8% as labor-force participation increased. Hiring has moderated, job openings have fallen from earlier peaks and wage growth has slowed, but employers continue to add workers.

That resilience is important to monetary policy. If unemployment were rising rapidly, the case for holding or cutting rates would strengthen. Instead, the Fed is confronting an economy in which consumer spending and employment remain relatively firm even after a historically fast series of rate increases. That makes it harder to know whether the current rate level is sufficiently restrictive to return inflation to 2% on a durable basis.

The committee’s language reflects that uncertainty. It says officials will assess “the extent of additional policy firming that may be appropriate,” taking into account the cumulative tightening already delivered, the lag with which monetary policy affects activity and inflation, and broader financial developments.

Holding rates steady still means maintaining substantial restraint

A pause is not the same as easing. The Fed’s implementation note keeps the federal funds target at 5.25% to 5.50%, the interest rate on reserve balances at 5.4% and the primary credit rate at 5.5%. The central bank is also continuing quantitative tightening, allowing Treasury and agency securities to run off its balance sheet subject to monthly caps.

For households and businesses, that means borrowing conditions remain restrictive even without another increase this month. Mortgage rates are near multi-decade highs, credit-card rates have risen sharply and financing for vehicles and business investment is more expensive. Banks have also tightened lending standards after the regional-bank stress earlier this year.

The Fed expects those conditions to weigh on demand over time, but the timing and magnitude are uncertain. Monetary policy operates with lags, so some of the economic effect of earlier increases may still be ahead. That is one reason officials can justify waiting for more data before deciding whether another increase is necessary.

The next decision will turn on whether cooling continues without renewed inflation pressure

The September meeting leaves the Fed in a deliberately flexible position. Officials have not promised another increase, but neither have they indicated that the current range is the peak. The revised projections show a committee more confident about near-term economic growth and less inclined to expect rapid rate cuts next year.

That shifts the central policy question. Earlier in the tightening cycle, the debate was largely about how quickly the Fed needed to raise rates. Now it is increasingly about how long a restrictive rate must remain in place to prevent inflation from settling above target.

Incoming inflation, employment, spending and credit data before the next meetings will determine whether the September pause becomes an extended hold or merely an interval before another increase. For borrowers and financial markets, the most consequential message from this week may therefore be less about the unchanged rate today than about the Fed’s new expectation that high rates could persist well into 2024.