Updated September 20, 2023 at 5:38 PM ET

The Federal Reserve left interest rates unchanged Wednesday, but signaled that it's open to an additional rate hike, if necessary, to combat stubborn inflation.

"We have come very far very fast in the rate increases that we've made," Fed chairman Jerome Powell told reporters. "I think it was important at the beginning that we move quickly and we did. As we get closer to the rate that we think — the stance of monetary policy that we think — is appropriate to bring inflation down to 2% over time, the risks become more two-sided."

The central bank has already raised rates 11 times in the last 18 months, most recently in July. That's the most aggressive series of rate hikes since the early 1980s, and leaves the Fed's benchmark borrowing cost between 5.25 and 5.5%.

Economic projections released Wednesday show most Fed policymakers think one additional rate hike will be needed before the end of this year. The Fed has rate-setting meetings scheduled in November and December.

"It's a no-brainer for the Fed to remain sounding hawkish at this meeting," said Michael Pearce, lead U.S. economist for Oxford Economics. They want to keep the optionality of additional hikes if they need to."

Inflation has fallen but is still high

While inflation has fallen substantially from a four-decade high last summer, it remains well above the Fed's target of 2%. The annual inflation rate inched up to 3.7% in August from 3.2% the month before — largely as a result of rising gasoline prices.

So-called "core inflation," which excludes volatile food and energy prices, was 4.3% in August.

"The Committee is strongly committed to returning inflation to its 2% objective," Fed policymakers said in their statement.

Contemplating the path forward

Members of the rate-setting committee also signaled that interest rates are likely to remain higher for longer than had been expected a few months ago.

In June, most committee members expected to cut rates in 2024 by an average of a full percentage point. A revised forecast issued Wednesday shows rates dropping by a more modest half percentage point next year.

"It feels like there's a higher bar for raising rates, but also a higher bar for cutting rates as well," Pearce said. "It just feels like the committee is setting themselves up for a prolonged pause, and just waiting see where the next few months of data will take us."

Higher borrowing costs have weighed on sensitive sectors of the economy such as housing. But consumer spending remains strong and unemployment is still low, although hiring has slowed in recent months.

Powell said despite challenges such as rising oil prices and a threatened government shutdown, he still sees an opportunity to curb inflation without tipping the economy into a recession.

"I've always thought that the soft landing was a plausible outcome," Powell said. "Ultimately this may be decided by factors that are outside our control."

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