Fed Analysis: Powell promises rates to stay higher for longer, USD set to extend gains

"Proceed carefully" – these words have meant a different thing today. The Federal Reserve (Fed) may raise rates more slowly, but the same logic works for rate cuts. That scares investors, and more may be in store.

While the Fed left interest rates unchanged, it went beyond leaving the door open to another increase this year. The bank raised its borrowing cost forecasts for 2024 to 5.1% from 4.6%, indicating only two rate cuts instead of four projected in its previous outlook.

Looking further into the future, officials converged around a median estimate of 3.9% in 2025, above the 3.4% originally forecast. Even in 2026, there is at least one member who sees rates hovering close to 5%.

For people planning to buy homes or businesses eyeing multi-year investments, the Fed provides fresh cold winds. The central tendency for the longer run has widened from 2.5-2.8% to 2.5-3.3%. The range is not only higher but also wider – investors hate uncertainty even more than higher rates. 

What is next for the US economy? The Fed aims for a soft landing – aka no recession – but it is not its baseline scenario, according to Chair Jerome Powell. That means it will stomach hard years to see inflation coming down.

All in all, the Fed has delivered a major "hawkish hold" – setting the stage for sustained US Dollar strength beyond the knee-jerk reaction. For stocks, the lack of conviction about a soft landing adds further pressure.