WATCH: Powell addresses latest Federal Reserve interest rate decision

Federal Reserve Chairman Jerome Powel addressed the media on today's interest rate decision at 2:30 p.m. ET. Those remarks are viewable in the video above.

WASHINGTON (AP) — For the first time in nearly two years, the Federal Reserve is set Wednesday to keep its key short-term interest rate unchanged for a second straight policy meeting — the clearest sign to date that the Fed is edging closer to the end of its rate-hiking campaign.

The Fed is standing pat, for now, in part because the economy has been moving mostly in the direction that Chair Jerome Powell has hoped for: Inflation has tumbled, even though hiring, consumer spending and economic growth have remained robust. A widely predicted recession hasn't materialized.

But the deceleration of inflation has slowed, and solid economic growth could keep inflation elevated or even send it higher. As a result, Powell and other Fed officials aren't yet willing to take a final rate hike off the table. At a new conference Wednesday, Powell will likely highlight the progress the central bank has made while still underscoring that inflation remains too high and that future rate hikes might be needed to finish the job of slowing inflation to the Fed's 2% target.

"The Fed has to talk tough on inflation," said Michael Arone, chief investment strategist at State Street Global Advisors. "They have no other choice if they want to keep their inflation-fighting credibility intact.".

Since March 2022, the Fed has raised its key rate from near zero to roughly 5.4% in its effort to tame inflation, which reached a four-decade high in 2022 as the economy roared out of the pandemic recession. The costs of mortgages, auto loans and credit card debt have all risen in response. Annual inflation, as measured by the government's consumer price index, has sunk from a 9.1% peak in June of last year to 3.7%.

Powell and other Fed officials are weighing two different trends as they consider their next moves: On the one hand, U.S. economic growth surged in the July-September quarter on the back of robust consumer spending, and hiring jumped in September, keeping the unemployment rate near a five-decade low.

On the other hand, turbulent financial markets have sent longer-term rates on U.S. Treasurys surging, driven stock prices lower and raised corporate borrowing costs. Several of the Fed's policymakers have said they think those trends may contribute to an economic slowdown — and, in process, ease inflation pressures — without the need for further rate hikes.

Economists at Wall Street banks have estimated that sharp losses in the stock market and higher bond yields over the past few months will have a depressive effect on the economy equal to the impact of three or four quarter-point rate hikes by the Fed.

"It's clearly a tightening in financial conditions," Powell said this month. "That's exactly what we're trying to achieve."

Though the Fed has raised its benchmark rate to a 22-year high, it hasn't imposed any hikes since July. Even so, the yield — or interest rate — on the 10-year Treasury note has kept rising, touching 5% last week, a level it hadn't reached in 16 years. The surge in Treasury yields has caused the average 30-year fixed mortgage rate to reach nearly 8%.

Market analysts say an array of factors have combined to force up Treasury yields. For one thing, the government is expected to sell potentially trillions of dollars more in bonds in the coming years to finance huge and persistent budget deficits even as the Fed is shrinking its holdings of bonds. As a result, higher Treasury rates may be needed to attract more buyers.

And with the future path of rates murkier than usual, investors are demanding higher yields in return for the greater risk of holding longer-term bonds.

What's important for the Fed is that the yield on the 10-year Treasury has continued to zoom higher even without rate hikes by the central bank. That suggests that Treasury yields may stay high even if the Fed keeps its own benchmark rate on hold, helping keep a lid on economic growth and inflation.

Powell has said the central bank can "proceed carefully" as it weighs the impact of the tighter credit on the healthy economy. And Christopher Waller, a member of the Fed's governing board, said last month, "I believe we can wait, watch and see how the economy evolves before making definitive moves" on interest rates.

Wall Street traders foresee a 97% probability that the Fed will leave interest rates unchanged Wednesday, according to the CME FedWatch Tool. And they envision only a 29% chance of a rate hike at the Fed's following meeting in December.