Members of the Federal Open Market Committee meet in Washington, D.C. on Sept. 20-21, 2022. Federal Reserve Photo

The Federal Reserve kept its key interest rate unchanged Wednesday after having raised it 10 straight times to combat high inflation. But in a surprise move, the Fed signaled that it may raise rates twice more this year, beginning as soon as next month.

The Fed’s move to leave its benchmark rate at about 5.1 percent, its highest level in 16 years, suggests that it believes the much higher borrowing rates it’s engineered have made some progress in taming inflation. But top Fed officials want to take time to more fully assess how their rate hikes have affected inflation and the economy.

Chair Jerome Powell offered a nuanced view Wednesday of how the Fed intends to address its core challenge at a time when inflation is both way below its peak but still well above the central bank’s 2 percent target.

“I would almost say that the conditions that we need to see in place to get inflation down are coming into place,” Powell said. “But the process of that actually working on inflation is going to take some time.”

The central bank’s 18 policymakers envision raising its key rate by an additional half-point this year, to about 5.6 percent, according to economic forecasts they issued Wednesday.

The economic projections revealed a more hawkish Fed than many analysts had expected. Twelve of the 18 policymakers forecast at least two more quarter-point increases in the Fed’s rate. Four supported a quarter-point increase. Only two officials envisioned keeping rates unchanged.

Powell emphasized that the Fed wants to move more slowly after its breakneck pace last year, when it carried out four straight three-quarter-point hikes, followed by a half-point increase and then three quarter-point hikes this year.

The Fed’s aggressive streak of rate hikes, which have made mortgages, auto loans, credit cards and business borrowing costlier, have been intended to slow spending and defeat the worst bout of inflation in four decades. Mortgage rates have surged, and average credit card rates have surpassed 20 percent to a record high.

The central bank’s rate hikes have coincided with a steady drop in consumer inflation, from a peak of 9.1 percent last June to 4 percent as of May. But excluding volatile food and energy costs, so-called core inflation remains chronically high. Core inflation was 5.3 percent in May compared with 12 months earlier, well above the Fed’s 2 percent target.

In response to the decision, National Association of Realtors chief economist Lawrence Yun reiterated his earlier criticism of the Fed’s continued rate-hike campaign.

“A monetary policy lag time exists between decision and inflation. The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4%. There is no need to consider raising interest rates. In fact, considering the balance sheet difficulties faced by community banks and weakness in the commercial real estate sector, the Fed should look at cutting interest rates before the end of the year. The Fed should look forward, not backward,” Yun said in a statement released by NAR.

Mortgage Bankers Association chief economist Mike Fratantoni was more measured in his analysis.

“The new set of economic projections shows that the median FOMC member expects two additional hikes by the end of 2023. Unfortunately, this only adds to the chances that the economy will slow sharply. Given the banking challenges that have already resulted in a tight credit environment, the threat of further hikes, baked in to medium-term rates today, will only further slow economic activity.  We expect that economic conditions will develop in such a way that further hikes are not needed, but this new information impacts markets immediately,” Fratantoni said in a statement released by the MBA.

If the Fed’s rate hikes induce further slowing in the economy, he added, mortgage rates could “drift” downward assuming the Fed responds to the cooling by holding off on further interest rate increases. And new MBA data released Wednesday suggests any downward drift could continue to bring homebuyers out of the woodwork. As mortgage rates slipped downward during the week of June 9 following a last-minute debt ceiling deal between the Biden administration and Republicans in Congress, mortgage applications increased 7.2 percent week-over-week, driven largely by purchase applications.

Should inflation come down further, other economists also think the Fed may not actually have to raise rates again.

“With inflation set to moderate noticeably, we are skeptical that the Fed will resume hiking interest rates,” Ryan Sweet, chief U.S. economist of Oxford Economics, wrote in a note. “Our baseline forecast is for the Fed to remain on hold through the remainder of this year before gradually easing in early 2024.”

One reason why Fed officials may be predicting additional rate hikes is that the economy has remained surprisingly resilient this year, with more persistent inflation that might require higher rates to cool. Their updated forecasts show them predicting economic growth of 1 percent for 2023, an upgrade from a meager 0.4 percent forecast in March. And they expect “core” inflation, which excludes volatile food and energy prices, of 3.9 percent by year’s end, higher than they expected three months ago.

Powell and other top policymakers have also indicated that they want to assess how much a pullback in bank lending might be weakening the economy. Banks have been slowing their lending – and demand for loans has fallen – as interest rates have risen. Some analysts have expressed concern that the collapse of three large banks last spring could cause nervous lenders to sharply tighten their loan qualifications.

The economy has so far fared better than the central bank and most economists had expected at the beginning of the year. Companies are still hiring at a robust pace, which has helped encourage many people to keep spending, particularly on travel, dining out and entertainment.

This story has been updated to include analysis from NAR and MBA economists and comments from Fed Chair Jerome Powell.

Banker & Tradesman staff writer James Sanna contributed to this story.