The Federal Open Market Committee decided to hold its key interest rate at 5.25-5.5% in September in a unanimous decision, according to its statement on Wednesday. The central bank had hiked the rates by 25 basis points in July, which took the benchmark rate to its highest in 22 years.

"Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain," it said, adding that the FOMC remains "highly attentive to inflation risks".

As many as 12 of 19 policymakers on the FOMC expect one more rate hike this year to be appropriate, according to Fed's economic projections. The remaining seven favour holding rates steady.

The committee projects the median Federal Funds rate at 5.1% in 2024, higher than its June estimate of 4.6%, suggesting that rates will remain higher for longer than earlier projections. It is expected to fall to 3.9% in 2025 and 2.9% in 2026.

"Holding the rate doesn't mean we have reached the stance we seek," Fed Chair Jerome Powell said, during the press conference after the FOMC decision was announced. But, he said the Fed is "fairly close" to where it needs to be on policy.

Fed is in a position to proceed carefully on firming rates, Powell said, adding that supply and demand conditions continue to come into better balance in the labour market. "Longer-term inflation expectations remain well-anchored."

While real interest rates are "meaningfully positive" now, they need to stay positive for some time, he said. "It's plausible that neutral rate is higher than longer-run rate."