Fed holds rates but lifts inflation outlook…sees 2.7% inflation this year [Fed Watch]

Policy rate kept at 3.50–3.75% per year

Median year-end policy rate held at 3.4%

PCE inflation forecast raised to 2.7%

Growth forecast also lifted from 2.3% to 2.4%

With the U.S. central bank (Fed) holding its benchmark rate steady, it raised its inflation forecast for this year, signaling that restrictive policy could remain in place for longer.

The Federal Open Market Committee (FOMC) on the 18th (local time) kept the target range for the federal funds rate at 3.50–3.75% per year. However, the accompanying Summary of Economic Projections (SEP) suggested that policy uncertainty has increased as the expected inflation path has moved higher than before.

Based on the median of Fed officials’ projections, the forecast for the personal consumption expenditures (PCE) price index this year was revised up to 2.7%, a sharp increase from the December projection (2.4%). Core PCE was also raised to 2.7%, reflecting a view that disinflation is proceeding more slowly than expected.

By contrast, the growth outlook improved slightly. The forecast for real gross domestic product (GDP) growth this year was raised to 2.4% from 2.3%. The unemployment rate was unchanged at 4.4%, with the labor market expected to remain relatively stable.

There was little change in the projected rate path. Fed officials put the median year-end policy rate at 3.4%, keeping it at the current level. The policy rate is expected to remain in the low-3% range in 2027–2028, while the longer-run neutral rate was put at around 3.1%.

Uncertainty surrounding the economic outlook was assessed as still elevated. According to the report, Fed officials see uncertainty around both growth and inflation as higher than historical averages, and judge risks to be mixed rather than skewed in a particular direction.

Markets are interpreting the outcome as “a more hawkish signal amid a hold.” With growth holding up but disinflation proving sluggish, investors see a greater chance that the Fed will not rush to cut rates.

With geopolitical risks in the Middle East adding to the backdrop, the future path of monetary policy is expected to become even more data-dependent. Markets are increasingly pricing in the possibility that the Fed will opt for “higher-for-longer” rather than rate cuts.

New York=Correspondent Park Shin-young nyusos@hankyung.com