The Federal Reserve left its key interest rate unchanged Wednesday for the second time in its past three meetings, a sign that it’s moderating its fight against inflation as price pressures have eased. But Fed officials also signaled that they expect to raise rates once more this year.

Consumer inflation has dropped from a year-over-year peak of 9.1% in June 2022 to 3.7%. Yet it’s still well above the Fed’s 2% target, and its policymakers made clear Wednesday that they aren’t close to declaring victory over the worst bout of inflation in 40 years. The Fed’s latest decision left its benchmark rate at about 5.4%, the result of 11 rate hikes it unleashed beginning in March 2022.

The Fed’s hikes have significantly raised the costs of consumer and business loans. In fine-tuning its rate policies, the central bank is trying to guide the U.S. economy toward a tricky “soft landing” of cooling inflation without triggering a deep recession.

The Fed’s decisions Wednesday underscored that even while its policymakers approach a peak in their benchmark rate, they intend to keep it at or near its high for a prolonged period. Besides forecasting another hike by year’s end, Fed officials now envision keeping rates high deep into 2024.

They expect to cut interest rates just twice next year, fewer than the four rate cuts they had predicted in June. They predict that their key short-term rate will still be 5.1% at the end of 2024 — higher than it was from the 2008-2009 Great Recession until May of this year.

The policymakers’ inclination to keep rates high for an extended period suggests that they remain concerned that inflation might not be falling fast enough toward their 2% target. The job market and the economy have remained resilient, confounding expectations that the Fed’s series of hikes would cause widespread layoffs and a recession.

“The process of getting inflation sustainably down to 2% has a long way to go,” Chair Jerome Powell said at a news conference. “We’ve seen progress, and we welcome that, but we need to see more progress” before concluding that it’s appropriate to end the rate hikes.

At the same time, Powell said he feels confident that the end of the rate-hiking cycle is near: “We’re fairly close, we think, to where we need to get.”

Treasury yields moved sharply higher Wednesday after the Fed issued a statement after its latest policy meeting and updated its economic projections. The yield on the two-year Treasury note, which tends to track expectations of future Fed actions, rose from 5.04% to 5.11%.

In their new quarterly projections, the policymakers estimate that the economy will grow faster this year and next year than they had previously envisioned. They now foresee growth reaching 2.1% this year, up from a 1% forecast in June, and 1.5% next year, up from their previous 1.1% forecast.

Core inflation, which excludes volatile food and energy prices and is considered a good predictor of future trends, is now expected to fall to 3.7% by year’s end, better than the 3.9% forecast in June. Core inflation, under the Fed’s preferred measure, is now 4.2%.

The approach to rate increases the Fed is now taking reflects an awareness among the officials that the risks to the economy of raising rates too high is growing. Previously, they had focused more on the risks of not doing enough to slow inflation.

In generating sharply higher interest rates throughout the economy, the Fed has sought to slow borrowing — for houses, cars, home renovations, business investment and the like — to help ease spending, moderate the pace of growth and curb inflation.

Though clear progress on inflation has been achieved, gas prices have lurched higher again, reaching a national average of $3.88 a gallon as of Tuesday. Oil prices have surged more than 12% in just the past month.

And the economy is still expanding at a solid pace as Americans, buoyed by steady job growth and pay raises, have kept spending. Both trends could keep inflation and the Fed’s interest rates high enough and long enough to weaken household and corporate spending and the economy as a whole.

While overall inflation has declined, the costs of some services — from auto insurance and car repairs to veterinary services and hair salons — are still climbing faster than they were before the pandemic. Still, most recent data is pointing in the direction the Fed wants to see: Inflation in June and July, excluding volatile food and energy prices, posted its two lowest monthly readings in nearly two years.
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