WASHINGTON -- The Federal Reserve kept its key short-term interest rate unchanged Wednesday for a second straight time but left the door open to further rate increases if inflation pressures should accelerate in the months ahead.
The Fed said in a statement after its latest meeting that it voted unanimously to keep its benchmark rate at about 5.4%, its highest level in 22 years. Since starting the most aggressive series of rate increases in four decades in March 2022 to fight inflation, the Fed has pulled back and has now raised rates only once since May.
The central bank's latest statement noted that recent tumult in the financial markets has sent longer-term interest rates to near 16-year highs and contributed to higher borrowing rates across the economy.
"Tighter financial and credit conditions for households and businesses," it said, "are likely to weigh on economic activity."
That reference echoed recent comments by Fed officials that higher yields -- or interest rates -- on the 10-year Treasury note could have a dampening effect on the economy, cool inflation and substitute for an additional rate increase by the Fed.
Speaking at a news conference, Chair Jerome Powell suggested that the surge in longer-term interest rates will slow the economy if those higher rates stay high for a prolonged period. But he cautioned that the Fed isn't yet confident that its own benchmark rate is high enough to reduce growth over time.
Still, the Fed chair said the central bank's policymakers recognize that the effects of their rate increases have yet to be fully felt in the economy and that they want to take time for an assessment.
"Slowing down" the rate increases, Powell said, "is giving us a better sense of how much more we need to do, if we need to do more."
The Fed chair expressed confidence that inflation, despite some signs of persistence in the most recent monthly data, is still heading lower even as the economy has kept growing.
"The good news," Powell said, "is we're making progress. The progress is going to come in lumps and be bumpy, but we are making progress."
Stock prices rose and bond yields fell as the Fed chair spoke to reporters, a sign that investors may be growing more confident that the Fed could be done raising interest rates.
Long-term Treasury yields have soared since July, the last time the Fed raised rates, swelling the costs of auto loans, credit card borrowing and many forms of business loans. Nationally, the average long-term fixed mortgage rate is nearing 8%, its highest level in 23 years.
Economists at Wall Street banks have estimated that recent losses in the stock market and higher bond yields could have a depressive effect on the economy equal to the impact of three or four quarter-point rate increases by the Fed.
Those tighter credit conditions, though, have yet to cool the economy or slow hiring as much as the Fed had expected. Growth soared at a 4.9% annual pace in the July-September quarter, powered by robust consumer spending, and hiring in September was strong. On Wednesday, the government said employers posted a sizable 9.6 million job openings last month, well below the peak of early last year but still sharply above pre-pandemic levels.
Consumer inflation has dropped from a year-over-year peak of 9.1% in June 2022 to 3.7% last month. But recent data suggests that inflation remains persistently above the Fed's 2% target.
Powell and other Fed officials have responded to the surprising evidence of economic strength by saying the Fed will monitor incoming data for any hints that inflation will either further subside or remain chronically above its target level. In the meantime, most Fed watchers expect the central bank to keep rates unchanged in December as well.
"There's a grand experiment in monetary policy that the world's central banks are unwinding," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "And since we've never seen this before, there's a bit of humility of how this all plays out. Or a lot."
Market analysts say an array of factors have combined to force up long-term Treasury yields and couple with the Fed's short-term rate increases to make borrowing costlier for consumers and businesses. For one thing, the government is expected to sell potentially trillions of dollars more in bonds in the coming years to finance huge budget deficits even as the Fed is shrinking its holdings of bonds. As a result, higher Treasury rates may be needed to attract more buyers.
And with the future path of rates murkier than usual, investors are demanding higher yields in return for the greater risk of holding longer-term bonds.
What's important for the Fed is that the yield on the 10-year Treasury has continued to zoom higher even without rate changes by the central bank. That suggests that Treasury yields may stay high even if the Fed keeps its own benchmark rate on hold, helping keep a lid on economic growth and inflation.
Other major central banks have also been dialing back their rate increases, with their inflation measures having appeared to bring improvement. The European Central Bank kept its benchmark rate unchanged last week, and last month inflation in the 20 countries that use the euro fell to 2.9%, its lowest level in more than two years.
Information for this article was contributed by Jonnelle Marte of Bloomberg News and Rachel Siegel of The Washington Post.