On Wednesday, the Federal Reserve decided to keep interest rates unchanged after its policy meetings. This is the fourth consecutive meeting where the central bank has opted not to raise interest rates during its current monetary policy cycle. In the short term, the Committee unanimously voted not to raise the fed funds rate for the fourth consecutive time. The key rate remains targeted within a range of 5.25% to 5.5%, the highest level in nearly 23 years.
The Federal Reserve conveyed a cautious message, signaling the end of interest rate hikes but not the start of rate cuts. Following their two-day meeting, the Federal Open Market Committee made significant changes to their statement. They removed language that suggested a willingness to raise interest rates until inflation reached the Fed’s 2% target.
However, they clarified that there are currently no plans to reduce interest rates, given that inflation remains above the target. The statement provided limited guidance, mainly focusing on potential policy adjustments. It stated that the Committee does not anticipate reducing the target range until they are more confident that inflation is sustainably moving towards 2%.
Fed Chair Jerome Powell emphasized the importance of waiting for additional data to confirm ongoing trends rather than seeking better data. While the statement condensed the factors considered for policy decisions, it did not explicitly rule out the possibility of further rate increases. A notable change was the removal of the consideration of the lagged effects of monetary policy, as officials generally believe it takes 12 to 18 months for policy adjustments to impact the economy.
The Committee outlined that they would carefully assess incoming data, the evolving outlook, and the balance of risks when considering adjustments to the federal funds rate target range. They noted that economic growth has been solid, and progress has been made in managing inflation. The statement mentioned that the risks related to employment and inflation goals are moving into better balance, but they remain highly attentive to inflation risks.
The statement omitted a key clause about the extent of potential future policy tightening, leaving the possibility of additional rate hikes somewhat open, contrary to some market expectations. Markets had anticipated a reduction in the benchmark interest rate as early as March or May, leading to a drop in stock prices immediately after the announcement.
Policymakers have been cautious about their intentions, emphasizing the need to observe data developments before making any hasty moves. Committee members indicated a likelihood of three quarter-percentage-point rate cuts this year, which is less ambitious than what futures markets had priced in.
The Fed has been navigating a period of decelerating inflation, a robust labor market, and steady economic growth. This has provided room for potential easing of monetary policy, but there is also caution about the possibility of an acceleration in economic growth and inflation. Alongside the 11 previous rate hikes, the Fed has been allowing its bond holdings to mature, reducing the central bank’s balance sheet by over $1.2 trillion. The statement indicated that this balance sheet reduction will continue.
https://www.federalreserve.gov/monetarypolicy/files/monetary20240131a1.pd
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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