Federal Reserve officials left interest rates unchanged on Wednesday and released a roundly optimistic set of economic forecasts that showed inflation fading more swiftly this year even with a solidly growing economy.

Altogether, the news suggested that Fed officials were beginning to see a better chance of a “soft landing”: a slowdown in inflation that does not require pronounced economic pain. While officials predicted that they could still make another rate increase before the end of 2023, they are treading cautiously to try to ensure that they do not overdo it and squeeze the economy more than is necessary to bring price increases back under control.

“We’re taking advantage of the fact that we have moved quickly to move a little more carefully now,” Fed Chair Jerome Powell said during a news conference after its meeting.

The Fed’s decision and its outlook suggested that a resilient economy was keeping central bankers both optimistic about growth — and firmly in inflation-fighting mode.

It was perhaps the most hopeful meeting since the Fed began its assault against rapidly rising prices 18 months ago. Inflation has faded substantially this summer even as consumers have continued spending and the labor market has held up, suggesting that healing from the pandemic and higher Fed interest rates are managing to weigh down price increases without tanking the economy.

Given that, Fed officials increasingly think that they can be both patient and resolute in their fight to return inflation to normal levels. They kept interest rates at a range of 5.25% to 5.5% rather than nudging them higher, buying themselves more time to watch how the economy is shaping up and determine whether further adjustments are warranted.

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But in addition to predicting that they could raise rates one more time this year, they forecast that they would keep borrowing costs higher for longer. Officials expect to cut rates just slightly next year, to 5.1%, up from 4.6% previously, based on their fresh set of quarterly economic projections.

That more elevated future rate path reflects that the economy is holding up better than expected in the face of the Fed’s policy changes so far: Officials forecast stronger growth, lower unemployment and slower inflation at the end of 2023 than they had earlier predicted.

In all, the Fed’s release and Powell’s news conference has made clear that the Fed is keeping its options open at a moment when the economic outlook is uncertain. While inflation is finally cooling, risks remain. Rising gas prices, sustained strong demand for some goods and services, and other issues still threaten to keep prices climbing too quickly for comfort. Officials do not want to declare victory prematurely, only to see inflation take off again.

“We want to see convincing evidence, really, that we have reached the appropriate level” on rates, Powell said, suggesting that Fed officials would require further evidence that inflation was coming down. “We’ve seen progress, and we welcome that.”

Fed officials have meetings in early November and mid-December, giving policymakers time to raise rates further in 2023 if they decide doing so is necessary.

Officials are trying to figure out how to thread a needle. They want to slow the economy enough to make sure that inflation comes firmly and fully back under control. But they do not want to go too far, crushing the economy more than is necessary to tame price increases and tossing people out of jobs in the process.

Calibrating monetary policy is difficult, because it takes months for the full effect of rate increases to trickle through the economy. Adjusting interest rates slowly by pausing along the way gives policymakers more time to assess incoming data, allowing them to make better-informed decisions.

While central bankers aren’t yet ready to predict with confidence that they’ll achieve a soft landing, they are trying to improve the chances by creeping ahead cautiously with interest rate moves.

“I’ve always thought that the soft landing was a plausible outcome — that there was a path,” Powell said Wednesday.

“I do think it’s possible,” he added, making clear that the Fed has been aiming for that type of gentle slowdown.

“A soft landing is a primary objective,” Powell said. “That’s what we’ve been trying to achieve, for all this time.”

Positive story

So far, economic data have been telling a largely positive story. Hiring has slowed and unemployment has risen slightly in recent months, to 3.8% in August. Officials expect it to average 3.7% in the final three months of 2023, down from 3.9% in their June forecast, their fresh economic projections showed.

At the same time, consumers have continued spending, which has helped to keep the economy chugging along at a solid pace. Officials upgraded their growth outlook in the fresh forecasts.

And even as the job market and overall economy have held up in the face of interest rate increases, inflation has faded substantially this summer.

That has happened partly because pandemic disruptions are receding and partly because the Fed’s higher interest rates are making mortgages, leases and business loans more expensive, cooling key parts of the economy.

The personal consumption expenditures price index — the Fed’s preferred measure of inflation — climbed 3.3% in July from a year earlier. That was down notably from a peak last summer of 7%, although it was still well above the 2% growth that the Fed targets.

The Fed pays even closer attention to a “core” index that strips out volatile food and fuel costs, and that measure climbed 4.2% in July, the latest month for which data is available.

Fed officials expect the core inflation measure to finish the year at 3.7%, suggesting that they still think a more marked slowdown is coming. But they think that it will take time for inflation to return fully to their goal: They do not expect 2% core inflation until 2026.

“It does read very much like a Goldilocks,” Blerina Uruci, chief U.S. economist at T. Rowe Price, said of the Fed’s economic projections. “We’re basically getting a deceleration in inflation with less pain on the economic front.”

When it comes to growth, “they are not seeing the deceleration that they would have anticipated, given the amount of monetary policy tightening that they have done,” Uruci said.

Still, risks loom ahead for economic growth. Higher interest rates are still trickling through markets, and they could combine with the resumption of federal student loan payments, strikes at major automakers, and a possible government shutdown to rattle consumer confidence and slow the economy in coming months.

‘No longer as cavalier’

That means that while officials expect to leave rates at high levels next year, those forecasts are anything but certain — and not, as Powell emphasized repeatedly on Wednesday, a set-in-stone plan.

The debate over the coming months is likely to focus on whether rates do need to climb again. And the question for next year is likely to be how long interest rates need to stay so high.

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“They’re very careful to avoid over-tightening,” said Gennadiy Goldberg, head of U.S. rates strategy at T.D. Securities. “They’re no longer as cavalier about delivering rate hike after rate hike.”

But officials also want to avoid changing their stance prematurely. If inflation flares up again, it could come at a serious cost, prodding consumers to expect higher prices in the future and making it tougher and more painful to stamp out inflation in the longer run.

“We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive” to lower inflation, Powell said. “Given how far we have come, we are in a position to proceed carefully.”

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