The Federal Reserve left interest rates unchanged on Wednesday but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year, as the U.S. central bank reacted to a stronger-than-expected economy and a slower decline in inflation.

In a press conference at the end of the central bank’s latest policy meeting, Fed Chair Jerome Powell described U.S. growth and the job market as holding up better than expected under the weight of the aggressive monetary policy tightening of the past year – likely lengthening the Fed’s fight to lower inflation but also letting it proceed with less economic damage.

The pause was out of caution, Powell said, to allow the Fed to gather more information before determining if rates do need to rise again, with the pace of its moves now less important than finding a proper endpoint that slows price increases while minimizing any rise in unemployment.

After a year in which many economists and analysts argued recession was imminent and the economy about to crack, under the Fed’s latest quarterly projections “growth estimates moved up a bit, unemployment estimates moved down a bit, inflation estimates moved up,” Powell said.

Taken together, the data suggested “more restraint will be necessary than we thought,” Powell said of new projections which showed a uniform shift higher in policymakers’ interest rate outlook for the year. Nine of 18 officials see the benchmark overnight interest rate moving up another half of a percentage point beyond the current 5.00%-5.25% range, while three others feel it needs to go even higher.

But Powell also said he felt that the pieces of the inflation puzzle were beginning to fall into place, with the Fed focused on “getting the policy right” as it contemplates what may be its final rate increases before declining inflation allows possible rate cuts next year.

“The conditions we need to see… to get inflation down are coming into place,” Powell told reporters, including below-trend growth, a somewhat weaker labor market, and improving supply chains. “But the process of that actually working on inflation is going to take some time.”

It was a subtly optimistic message that tempered otherwise hawkish projections that see the policy rate rising higher than market participants anticipated.

Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said she thought that was no mistake, with the Fed now keeping its options open in case further rate increases are needed, but not committed if inflation does decline faster than anticipated.

“The ‘dots’ are hawkish, but he did a good job of telling markets not to see it as such,” she said.

In fact, investors in contracts tied to the Fed’s policy rate see the central bank delivering only one quarter-percentage-point increase by the end of the year. They see about a 65% chance of a rate hike next month, up only slightly from before this week’s meeting.

‘LIVE MEETING’

Though Powell repeated the Fed’s standard warning about “upside” risks to inflation, the decision to hold steady at this time was also an effort to try to ease the pace of price increases “with the minimum damage” to the job market. The new projections showed the unemployment rate rising by the end of 2023 to 4.1% from the current 3.7%, but that is a significantly smaller increase than the 4.6% jobless rate officials projected in March.

“Holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy” before taking another step, the central bank’s rate-setting Federal Open Market Committee (FOMC) said in a unanimous policy statement at the end of its two-day meeting.

Powell said that even as officials have not decided what they will do with rates, the July 25-26 gathering is a “live meeting” which could bring another increase.

“This looks like a meeting where the Committee was split, everybody got something, and nobody got everything. A dovish decision, a hawkish statement, and very hawkish dots,” wrote economists at the analytics firm of Larry Meyer, a former Fed governor. “Ultimately … though Powell was vague on many points, we see his press conference as relatively dovish.”

U.S. stocks fell after the policy decision, but by the end of the day the Nasdaq Composite and the S&P 500 indexes had closed slightly higher. The Dow Jones Industrial Average was off 0.68%.

STRONGER ECONOMIC OUTLOOK

The Fed’s higher rate outlook coincides with an improved view of the economy and, consequently, slower progress in returning inflation to the central bank’s 2% target. It is currently more than double that.

Fed officials at the median more than doubled their outlook for 2023 economic growth to 1%, from 0.4% in the March projections.

The core Personal Consumption Expenditures Price Index is seen dropping from the current 4.7% to 3.9% by the end of 2023, compared to a 3.6% year-end rate seen in the March policymaker projections.

The policy decision on Wednesday snapped a string of 10 consecutive rate hikes delivered as the Fed responded to the worst outbreak of inflation in 40 years with a matching set of aggressive moves, including four outsized increases of three-quarters of a percentage point last year.

The central bank’s policy rate, which influences household and business borrowing costs throughout the economy, rose a full 5 percentage points from the onset of the tightening cycle in March 2022, reaching the highest level since just before the start of the 2007-2009 recession.