The Federal Reserve paused its interest rate hikes after 10 consecutive increases

• The Federal Reserve announced it's pausing interest rate hikes at its Wednesday meeting.
• This comes after 10 consecutive interest rate increases in 15 months.
• The Fed decision is another step in its attempt to strike a balance between bringing inflation back to its target without going at a pace that would disturb growth.

The nation's central bank has come one step closer to curbing its war on inflation, which continues to cool.

The Federal Open Market Committee (FOMC) announced it's holding interest rates steady at its Wednesday meeting, putting a pause to the central bank's 10 consecutive increases in 15 months. This leaves the target benchmark borrowing rate between 5% and 5.25%.

"In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the Fed announced.

The Fed decision also comes with the projection of another two 25 basis point rate hikes before the end of 2023, which would bring the benchmark rate to between 5.5% and 5.75%.

The Fed's decision is another step in its attempt to strike a balance between slowing the economy to a point where inflation is back to its target while going at a pace that won't disturb growth, which could lead to widespread job loss. Tight monetary policy, inflation still well above the 2% target, and a low unemployment rate have all made this balance difficult to achieve, especially with the threat of a recession still lingering.

Some market observers believe this could be just a temporary pause as the Fed takes in more information about the state of the economy. Seema Shah, chief global strategist at Principal Asset Management, wrote in an email to Insider that despite a June CPI report that was "simply not hot enough" to change the Fed's decision to pause its hiking cycle, "stubbornly elevated" inflation has kept prospects for an additional hike in July "very much alive."

"The ongoing strength of the labor market, coupled with the stickiness of core inflation, means that the FOMC meeting will likely represent a 'skip' rather than a 'pause,'" said Shah. "Without a meaningful downside surprise in both jobs and inflation, a final interest rate hike remains in the cards for July."

Thomas Simons, senior economist at Jefferies, told Insider he feels that rate hikes are done for the year as the Fed looks to close in on bringing inflation back to the 2% target. As consumer spending data slows, the resumption of student loan payments in September suggests even more signs of a slowdown, he said. The June pause, he said, could give the Fed more time to to see if the slowing is part of a larger downtrend.

"Inflation may remain sticky for a while, but the slowdown in spending will translate into labor market weakness that keeps the Fed on the sidelines," Simons said. "We are seeing 'goldilocks,' 'soft landing' data right now, but I do not think it will last."

As inflation levels slow to the lowest since 2021, Simons said he expects inflation to continue slowing but at a "dissatisfying rate." He said a major risk to the economy could be an acceleration of inflation, which could potentially drive more interest rate hikes and disrupt the slow but steady inflation easing.

Following the failures of Silicon Valley Bank and First Republic Bank, credit conditions tightened, in part pushing the Fed to skip this month's rate hike amid a lending pullback.

"The regional bank crisis is a wild card," Marta Norton, chief investment officer for Morningstar Wealth's America division, told Insider. "While government programs have likely stabilized deposits and early failures are more likely the result of individual mismanagement and not a larger systematic risk, the savings & loan crisis, which lasted for years, showcases the uncertainty of these businesses at markedly higher interest rate levels."

Consumer Price Index (CPI) data from Tuesday reveals the consumer is still feeling cost pressures even as inflation cools. Core CPI, excluding food and energy which are more volatile, has been sticky, rising 0.4% from April to May driven in part by a 0.4% jump in shelter prices over the same period. Used vehicle prices were up 4.4% in May, while transportation services rose 0.8% for the month.

The CPI overall showed decelerating headline inflation, dropping from 4.9% last month to 4% in May, the lowest level since March 2021.

Kathy Gramling, EY Americas consumer leader, told Insider that the recent CPI data and the Fed decision will give consumers a bump of confidence going into the summer as Americans tap more into credit and embrace more practical shopping. EY's latest Future Consumer Index from May found that 94% of consumer respondents remain concerned about rising living costs, with 49% planning only to spend on essential products. 67% said they expect to be more aware and cautious of spending in three years.

"I think consumers will feel another level of confidence and reassurance if the Fed takes a pause this week," Gramling said. "That will continue to see the consumer spend their way through the summer, and as we know, American consumers are always good at that."

The Fed isn't seeing a slowdown in line with expectations for inflation to fall to pre-pandemic levels, and this underscores how the market's expectations have repeatedly been behind the curve, said Norton of Morningstar Wealth. Norton estimates the lag on Fed policy is approximately 12 to 24 months, and noted that there's still a long way to go for inflation to fall to more acceptable levels.

US inflation on the wholesale level cooled below expectations, according to Producer Price Index (PPI) data released Wednesday. For the 12 months ended in May, annual producer price increases eased to 1.1%, well below expectations of 1.5%, making this the 11th consecutive month this metric has slowed. Prices fell 0.3% from April to May.

Fed Chairman Jerome Powell will field questions at 2:30 p.m. ET to explain the rationale behind the decision.

This is a developing story, check back here for updates.