Fed Holds Rates Steady and What’s Next on the Card?

The Federal Reserve kept the interest rates unchanged and took a cautious stance as rapid inflation slowdown but was not yet overcome. However, it didn’t rule out future increases in interest rates. This article “titled: Fed Holds Rates Steady and What’s Next on the Card?”, delves into the Federal Reserve’s decision to maintain interest rates, the factors influencing their stance, and the potential impact on the economy. Gain insights into the rationale behind the Fed’s approach, its implications for inflation, and the challenges policymakers face.

Federal Reserve Monetary Policy Stance

On November 01, 2023, the Federal Reserve announced its monetary policy. The Policy statement stated that the economic activity expanded at a strong pace in the third quarter, where job gains have moderated and the unemployment rate has remained low. While Inflation remains elevated. 

The Policy statement said “The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

It stated that the committee decided to maintain the target range of the federal funds rate at 5.25 to 5.50 percent (i.e.5 ¼ to 5 ½ percent). Further, it said that the committee will be gauging the additional information with its effects on monetary policy. 

The Policy stance stated that the committee will consider the economic and financial development, cumulative tightening of monetary policy, and time lags on the economic activity as well as inflation, to determine the level of firming additional policy to bring inflation to the target of 2 percent. 

The Committee has decided to continue reducing its holding of Treasury securities and agency debt along with agency-backed mortgage-backed securities as planned earlier. The Committee is well committed to bringing inflation to its target of 2 percent.

Policy Stance Analysis – How it is Good for the Economy

On July 26, 2023, the Federal Reserve hiked the target range for the federal funds rate to 5.25 to 5.50 percent (i.e. 5¼ to 5½ percent). Since then, the federal funds rate has been on hold. It is to be remembered that the hike went up from near-zero in March 2022 to the present federal rate. The Federal Reserve believes that by keeping high borrowing costs they can slow down the economy.

Inflation has come down since 2022. The inflation has come down from more than its peak of 7 percent to 3.7 percent in September 2023. Now, as the demand is cooling down the Federal Reserve hopes that production companies may increase prices sooner. The Federal Reserve is doing its best and is committed to restoring inflation to its target of 2 percent. The Fed Policymakers are hoping for a rare “soft landing” as the economy is showing resilience along with moderate inflation. However, the strong endurance of the economic activities questions whether the Fed has done enough to slow down demand and inflation. This leaves the question of whether the Fed should make one more (or say final) rate increases in coming months to slow down the economy. 

Fed Chair Jerome H. Powell, in a Press Conference on Monetary policy, stated that the stance of policy is restrictive; which means tight policy to put downward pressure on inflation and economic activity. He stated that the tightening of monetary policy is yet to be felt, hence the committee has decided to leave their policy rate unchanged while they continue to reduce their securities holdings. 

He further stated “Given how far we have come, along with the uncertainties and risks we face, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks”

Fed Chair said that inflation is well above the Fed’s longer-run goal of 2 percent. Total Personal Consumption Expenditure (PCE) inflation rose 3.4 percent over the year in September. He said that still a long way to go to bring inflation to its sustainable level of 2 percent. However, it appears that long-term inflation is well anchored, said the Fed chair. 

Our Perspective/Conclusion

Federal Reserve’s estimates seem to be fading or failing, as they estimate that the target rate will average 2.5% in the longer run. The longer the Fed hold on cutting rates the inflation may reach above the target of 2%. However, there are advantages to holding the higher rates. One, it gives more room for the Fed to cut the rates if a recession hits the economy. Two, holding higher rates is normally seen as an economy with stronger productivity and the potential to grow rapidly. 

Some feel that as the Fed did not raise the rate as the markets expected, therefore the Fed has done away with rate hikes. However, we cannot say that the Fed has done away with rate hikes. In a Press conference on Monetary Policy, the Fed Chair clearly stated that this time Fed was not able to reach any judgement on the rate hikes with the available information, and for the next meeting the committee may have enough information to make judgments. If they do reach a judgment, on whether they need further tightening of policy then the Fed will further tighten policy and have rate hikes. 

We need to wait and watch how things are going to unwind as the economic data releases will be available this week and what will be the stance of the Fed in their next meeting which is to be held on December 12-13, 2023.What can go wrong? Well, there are many things which could go wrong from here. Inflation can reaccelerate which may force the Fed to raise the rates which may result in recession. Long-term interest rates along with an increase in mortgage rates, as a result of the time lag effects of the Fed’s past rate hikes, can cost more than what the economy can absorb. We need to remember that the economy is already facing a Debt Surge adding more pressure on policymakers. Policymakers are walking on a tightrope with a hope to come out of this situation at the earliest.

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