U.S. central bank's projection of the target federal funds rate rising to 5.1% in 2023 is slightly higher than investors expected heading into this week's two-day policy meeting and appeared biased if anything to move higher.

Only two of 19 Fed officials saw the benchmark overnight interest rate staying below 5% next year, a signal they still feel the need to lean into their battle against inflation that has been running at 40-year highs.

"The (Federal Open Market) Committee is highly attentive to inflation risks ... Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time," the Fed said.

The new statement, approved unanimously, was released after a meeting at which officials scaled back from the three-quarters-of-a-percentage-point rate increases delivered at the last four gatherings.

The Fed's policy rate, which began the year at the near-zero level, is now in a target range of 4.25% to 4.50%, the highest since late 2007.

U.S. stocks turned negative following the release of the policy statement. In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year and 10-year notes rose. The dollar edged higher against a basket of currencies.

Only two of 19 Fed officials saw the benchmark overnight interest rate staying below 5% next year, a signal they still feel the need to lean into their battle against inflation that has been running at 40-year highs.

"The (Federal Open Market) Committee is highly attentive to inflation risks ... Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time," the Fed said in a statement nearly identical to the one it issued at its November meeting.

Latest Updates

U.S. import prices drop further; inflation pressures easing

Russia improves Q3 economic contraction to 3.7% y/y - revised data

China plans to expand domestic demand to spur economy - state media

UK inflation falls from 41-year high in run-up to BoE rate decision

The new statement, approved unanimously, was released after a meeting at which officials scaled back from the three-quarters-of-a-percentage-point rate increases delivered at the last four gatherings. The Fed's policy rate, which began the year at the near-zero level, is now in a target range of 4.25% to 4.50%, the highest since late 2007.

U.S. stocks turned negative following the release of the policy statement. In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year and 10-year notes rose. The dollar edged higher against a basket of currencies.

"Taken together, today's statement and economic projections tell a simple, but persuasive story: this Fed isn't prepared to 'pivot' in any meaningful way until it sees sustained and conclusive evidence of a reversal in inflationary pressures," said Karl Schamotta, chief market strategist at Corpay.

Fed Chair Jerome Powell said in his press conference following the FOMC meeting that the speed of rate rises is less critical now, adding he's not yet ready to say recent good news on inflation points to a peak in price pressures.

"It's not as important how fast we go," Powell said, noting the bigger question facing policymakers now is where the Fed stops and how long it stays there.

Meanwhile, "the inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path," Powell said.

The new federal funds rate outlook, a rough estimate of where central bank officials feel they can pause their current hiking cycle, was issued along with economic projections showing an extended battle with inflation still to come, and with near recessionary conditions developing over the year.

Inflation, based on the Fed's preferred measure, is seen remaining above the central bank's 2% target at least until the end of 2025, and will still be above 3% by the end of next year.

The median projected unemployment rate is seen rising to 4.6% over the next year from the current 3.7%, an increase that exceeds the level historically associated with a recession.

U.S Gross domestic product is seen growing by just 0.5% next year, the same as estimated for 2022, before rising to 1.6% in 2024 and 1.8% in 2025, a level considered to be the economy's long-run potential.

Original Story By | Howard Schneider and Ann Saphir