03:36 PM EDT, 03/22/2024 (MT Newswires) -- The Federal Reserve likely remains on track to start lowering its benchmark lending rate at some point this year, though a steep rise in inflation could prompt it to shelve the idea of rate cuts and even consider further policy tightening, Stifel said Friday.

On Wednesday, the central bank's Federal Open Market Committee held interest rates steady at 5.25% to 5.50%, its fifth straight pause. The committee started rate hikes in March 2022 to tame inflation. The FOMC's updated Summary of Economic Projections showed Wednesday that members continue to see the median federal funds rate at 4.6% for 2024, indicating three rate cuts. The committee raised its median rate expectations for 2025 and 2026.

Official data released last week showed that US February producer prices rose more than expected, while core consumer inflation -- which excludes the volatile food and energy components -- also topped market views. Last month, government data showed that consumer and producer inflation came in hotter than expected for January.

Following the FOMC's meeting, Fed Chair Jerome Powell said Wednesday that policymakers would not "overreact" to the recent inflation data, nor they are going to ignore them. "The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the FOMC said Wednesday, echoing remarks contained in its Jan. 31 monetary policy decision statement.

"The disinflationary trend of 2023 appears to have been disrupted, with the latest inflation data uneven at best, stabilizing nearer 4%, double the Fed's intended target," Stifel Chief Economist Lindsey Piegza and Economist Lauren Henderson said in a Friday note. Policymakers are still confident about starting interest rate cuts at some point later in 2024, though they need to see continued progress on the inflation front first, according to the note.

"While still hopeful the recent uptick will prove short-lived, an ongoing lack of improvement in the inflation data, or worse, a sizable reversal in last year's declining trend could force the Fed to more permanently shelve the notion of rate cuts, or even reconsider additional rate hikes," the economists said.

Markets are currently pricing in a roughly 12% probability of a 25-basis-point rate cut at the FOMC's next meeting, which is scheduled for April 30 to May 1, according to the CME FedWatch Tool. On Wednesday, FOMC members updated their US economic growth outlooks through 2026, with this year's real gross domestic product rate now pegged at 2.1%, up from 1.4% projected in December.

"The Fed has been hyper-focused on achieving the utopic scenario of a soft landing whereby the committee raises rates to a sufficiently restrictive level to eventually reinstate price stability without sending the economy into negative territory," Stifel said. "However, with attention on maintaining positive growth, the committee may have inadvertently failed to raise rates high enough to quell price pressures."