Federal Reserve officials raised interest rates to their highest level in 22 years and left the door open to further action as they continued their 16-month campaign to wrestle inflation lower by cooling the American economy.
Officials pushed rates to a range of 5.25 to 5.5 percent, their highest level since 2001, in a unanimous decision.
Jerome H. Powell, the Fed chair, suggested in a news conference following the decision that while the “pieces of the puzzle” that could allow inflation to sustainably slow down are beginning to come together, rates had not yet been high enough for long enough — and that the Fed was “prepared to further tighten” if necessary.
The Fed chief carefully kept the central bank’s options open at an uncertain economic juncture, one that offers reasons for both optimism and caution.
Fed policymakers began to raise rates from near-zero in March 2022 and pushed them up rapidly last year before adjusting them more slowly in 2023, even taking a break last month. Because officials think rates are now high enough to weigh on the economy, they have been moving more gradually to give themselves time to see how growth, the job market and inflation are responding to the shift in policy.
Inflation as measured by the Consumer Price Index cooled in June to 3 percent from a peak of 9.1 percent, though it remains faster than that after stripping out food and fuel prices, which are volatile. The moderation has been welcome news at a time when the unemployment rate is hovering at 3.6 percent — a historically low level, and essentially unchanged from when the Fed began to push rates higher more than a year ago.
But inflation has previously slowed and then picked back up, and the Fed is not yet ready to take a victory lap. Mr. Powell said officials would be watching incoming data ahead of the Fed’s Sept. 20 meeting to decide whether they need to raise interest rates further at that gathering. He avoided explaining what precisely would prompt the Fed to either lift rates or hold them steady, noting that the Fed has eight weeks and a substantial amount of incoming data to review before it must decide.
“We’ve come a long way,” Mr. Powell said at one point. “Inflation repeatedly has proved stronger than we and other forecasters have expected — and at some point that may change. We have to be ready to follow the data and given how far we’ve come, we can afford to be a little patient as well as resolute as we let this unfold.”
Higher interest rates cool the economy by making it more expensive to borrow money, discouraging business expansions and making it costlier to take out a mortgage or a car loan. But it takes time for them to trickle through the economy, so the full effects of the moves so far most likely have not been felt. Policymakers want to make sure that they temper demand enough to put an end to rapid price increases, but they would prefer to avoid plunging the economy into a recession if they can avoid it.
That is why investors and economists have begun to think that the Fed may hold off on additional rate increases. With inflation coming down, officials may feel confident holding policy steady and waiting to see if the trend will continue.
“The really clear message was: Things are data dependent,” said Michael Feroli, chief U.S. economist at J.P. Morgan, adding that he thought Mr. Powell’s comments and manner seemed to lean optimistic. “It felt like he was biased to perhaps be a little bit patient here and see if this disinflation has some legs.”
After fluctuating higher and lower as Mr. Powell spoke, stocks across all three major indexes — the S&P 500, the Nasdaq Composite and the Dow — ended the day close to where they started. The S&P and Nasdaq posted modest losses. The Dow moved 0.2 percent higher to record its longest streak of daily gains since the 1980s.
Economists have recently become increasingly hopeful that the Fed might be able to slow inflation without causing an outright economic downturn, clinching what is often called a soft landing. In a nod to the economy’s resilience, officials noted on Wednesday that it was expanding at a “moderate” pace, an upgrade from “modest” in their June statement.
And the Fed’s influential staff economists — who help policymakers assess the outlook — no longer think America will fall into a recession late this year, Mr. Powell said. They previously had forecast a mild one.
But Fed officials may not feel confident that inflation will return to their 2 percent goal quickly or completely enough at a time when growth remains so robust.
If consumer spending continues to chug along, companies may still have the wherewithal to raise prices without losing customers: Firms including Coca-Cola, PepsiCo and Unilever, for instance, have all recently reported price increases. Although the slowdown in inflation so far is welcome news, it has been driven primarily not by their policy changes, but by a slow return to normal after years of pandemic-related disruptions across a range of products, from cars to couches.
“We think we need some further softening in labor market conditions,” Mr. Powell said on Wednesday, noting that while that might hurt, high inflation would also harm the most vulnerable people in the economy.
That is why policymakers are keeping alive the possibility that they could continue raising interest rates.
The Fed projected in June that it would make two more rate increases this year — the one it ushered in on Wednesday, and a follow-up at some point in the future. Mr. Powell made clear that such an increase remained entirely possible.
“We’re looking for supply and demand through the economy coming into better balance, including in particular the labor market,” Mr. Powell explained. “We’ll be asking ourselves: Does this whole collection of data, do we assess it as suggesting that we need to raise rates further?”
At the same time, Mr. Powell and his fellow policymakers have little reason to signal clearly what comes next. No policy meeting is held in August, though Mr. Powell often speaks at a closely watched Fed conference in Jackson Hole, Wyo., late in the month.
Fed officials will not release a fresh set of quarterly economic projections until their meeting on Sept. 20. And if they choose to skip raising rates at that meeting — like they did in June — that would make Nov. 1 the next meeting before policymakers must make a big rate decision.
Other Fed officials — including Mary C. Daly, the president of the Federal Reserve Bank of San Francisco — had previously said that they wanted to keep their options open for now. Christopher J. Waller, a Fed governor, suggested this month that he would favor moving rates up in September if inflation was looking hot, but could be open to holding off if price increases continued to cool.
“The September meeting is a ‘live’ meeting and it depends on the data,” Mr. Waller said at an event in New York after the latest Consumer Price Index inflation report showed a notable slowdown. “We’ll get two more C.P.I. reports. If they look like the last two, the data would suggest maybe stopping.”
Joe Rennison and Madeleine Ngo contributed reporting.
