Updated November 1, 2023 at 6:16 PM ET

The Federal Reserve left interest rates unchanged Wednesday, but signaled that future rate hikes are still possible if that's what it takes to curb stubborn inflation.

This was the second meeting in a row in which policymakers held rates steady at 5.25% to 5.5%, following an aggressive series of increases over the previous year-and-a-half.

"In light of the uncertainties and risks and how far we have come, the [central bank's rate-setting] committee is proceeding carefully," said Fed Chair Jerome Powell.

Inflation has fallen significantly since hitting a four-decade high last summer, but prices are still climbing faster than the Fed's target of 2% per year.

Despite the sharp run-up in borrowing costs, consumers are still spending freely on cars, restaurant meals and Taylor Swift concert tickets. The nation's economy grew at an annual pace of 4.9% in July, August and September, with personal spending driving much of that increase. The Fed noted that "strong" pace of growth in announcing its decision.

"Clearly people are still spending," Powell told reporters. "The dynamic has been really strong job creation with now wages that are higher than inflation, and that raises real disposable income and that raises spending."

Ready to act

Eventually, that robust spending could reignite inflation, requiring additional rate hikes. For now, though, the Fed is content to play wait and see. That's partly because the effects of the earlier rate increases are still being felt. Policymakers said in a statement they would consider "the lags with which monetary policy affects economic activity and inflation" in deciding whether additional rate hikes are necessary.

The Fed is also monitoring the job market, which has shown remarkable resilience in the face of rising interest rates. Unemployment has been under 4% for 20 months in a row. That streak will likely be extended to 21 months when October's jobless rate is reported on Friday.

The tight job market continues to put upward pressure on wages. Employers' cost for wages and salaries rose 4.6% for the twelve months ending in September, the Labor Department reported Tuesday. While that's a smaller increase than the previous year, it's likely to keep prices climbing faster than the Fed's 2% target.

Borrowing costs have risen

In addition to the Fed's moves on short-term interest rates, long-term borrowing costs — which are set by the bond market — have also been going up. The average cost of a 30-year home mortgage, for example, is now 7.79% according to Freddie Mac -- the highest since 2000.

That's tamped down demand for houses and related items such as furniture and appliances, taking some pressure off the Fed.

"The rise in long-term rates has done some of the Fed's dirty work for them," said Greg McBride, chief financial analyst at Bankrate. "They can afford to sit back and not raise short-term interest rates at this point because the move up in long-term rates has been so pronounced, and it has the effect of reducing demand in the economy."

The Fed has already raised short-term interest rates eleven times since March of last year, pushing its benchmark rate from near zero to the highest in over 20 years.

Policymakers signaled in September that, on average, they expect one more quarter-point rate increase by the end of the year. The next rate-setting meeting is scheduled for mid-December.

Copyright 2023 NPR. To see more, visit https://www.npr.org.



For the better part of two years, the Federal Reserve has been raising interest rates in an effort to tamp down demand and bring prices under control. The inflation dragon has not been beaten yet, but it is not breathing as much fire as it once was. And now the Fed has to worry about pouring too much cold water on the economy. Faced with that uncertainty today, the Fed decided to do nothing and leave short-term interest rates where they are. NPR's Scott Horsley is here to explain. Hey, Scott.


SHAPIRO: This is the second meeting in a row that the fed opted to leave interest rates unchanged. What's behind the decision?

HORSLEY: You know, the Fed is kind of feeling its way through this very uncertain and unusual economic environment. Since spring of last year, it has raised interest rates very aggressively. Its benchmark rate is now the highest it's been in more than two decades. And Fed Chairman Jerome Powell suspects some of the impact of those earlier rate hike is still making its way through the economy.


JEROME POWELL: In light of the uncertainties and risks and how far we have come, the committee is proceeding carefully.

HORSLEY: Now, the Fed has not ruled out additional interest rate hikes in the future. But for now, it's going to stand pat in wait-and-see mode.

SHAPIRO: At the same time, mortgage rates keep climbing. How does that fit into the picture?

HORSLEY: That's right. Mortgage rates are largely tied to the bond market, and they have continued to go up even as the Fed has been holding steady on short-term interest rates. The average interest rate on a 30-year mortgage is now close to 8%, which is the highest it's been since the year 2000. Powell says that is serving as a kind of additional brake on the economy.


POWELL: You see what's happening in the housing market, you're seeing that now. You'll see, if you look at surveys of people, it's not a good time, they think, to buy durable goods of various kinds because rates are so high now.

HORSLEY: There's been a slowdown in housing-related, long-lasting things like furniture and appliances. And, of course, sales of existing homes are the lowest they've been in more than a dozen years.

SHAPIRO: How's the broader economy looking right now?

HORSLEY: Well, that's the strange thing, it's still chugging along. You know, last week, the Commerce Department reported that GDP grew at an annual pace of almost 5% in July, August and September. That is certainly not what one would expect when interest rates are as high as they are right now. Powell says the economy has proven to be remarkably resilient, and that's largely driven by ordinary people opening up their wallets, buying cars and restaurant meals and taking trips and going to Taylor Swift concerts.


POWELL: Clearly, people are still spending. The dynamic has been, really, strong job creation with now wages that are higher than inflation. And that raises real disposable income, and that raises spending.

HORSLEY: In its statement this afternoon, the Fed described economic activity as strong, which I guess is an upgrade from September when it called the economy solid. It is an open question how long this can continue. Most forecasters don't think GDP is going to grow as fast in the fourth quarter as it did in the third, but, you know, the job market is still really strong. Unemployment's been under 4% for 20 months in a row. We'll probably make that 21 months when we get the October readout on Friday.

None of this is what people were expecting a year ago, when many forecasters thought it would take a recession and a spike in unemployment to bring inflation under control. Now, getting inflation all the way back down to the Fed's target of 2% may still take some slowdown in economic growth and maybe some softening in the labor market. But for the moment at least, Fed economists are not projecting any recession.

SHAPIRO: Good news from NPR's Scott Horsley. Thanks, Scott.

HORSLEY: You're welcome.

(SOUNDBITE OF CHARLIE PUTH SONG, "LOSER") Transcript provided by NPR, Copyright NPR.

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