Federal Reserve Signals End to Interest Rate Hikes, but No Plans to Cut Rates Yet
In a surprising move, the Federal Reserve has signaled that it is done raising interest rates for now. However, it made it clear that it is not yet ready to start cutting rates. This shift in stance was reflected in a substantially changed statement released after the central bank’s two-day meeting this week.
The Federal Open Market Committee (FOMC) removed language from its statement that had indicated a willingness to keep raising interest rates until inflation had been brought under control and was on its way toward the Fed’s 2% inflation goal. This change suggests that the Fed is taking a more cautious approach to monetary policy.
Despite signaling an end to interest rate hikes, the FOMC also stated that there are no plans yet to cut rates, as inflation is still running above the central bank’s target. The statement provided limited guidance on future policy adjustments, stating that the Committee does not expect to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
During Fed Chair Jerome Powell’s news conference, he emphasized the need for more data to verify the continuation of positive economic trends. Powell stated, “We want to see more good data. It’s not that we’re looking for better data, we’re looking for a continuation of the good data we’ve been seeing.”
While the committee’s statement did condense the factors that policymakers would consider when assessing policy, it did not explicitly rule out more interest rate increases. However, one notable change was the removal of the consideration of lagged effects of monetary policy. Officials now believe that it takes at least 12 to 18 months for adjustments to take effect.
The changes in the statement reflect the Federal Reserve’s efforts to chart a course ahead, with inflation moving lower and economic growth remaining resilient. The statement acknowledged that economic growth has been solid and noted the progress made on inflation. It also stated that the risks to achieving employment and inflation goals are moving into better balance, indicating cautious optimism.
The removal of a key clause referencing “the extent of any additional policy firming” has left some Fed watchers uncertain about the possibility of future rate hikes. Prior to the meeting, markets had expected the Fed to begin reducing its benchmark overnight borrowing rate as soon as March. However, policymakers have been more cautious in their intentions, emphasizing the need to monitor data before making any further moves.
In December, committee members indicated a likelihood of three quarter-percentage point rate cuts this year, which is less ambitious than what futures markets are pricing. This difference in expectations highlights the uncertainty surrounding future monetary policy decisions.
The Federal Reserve’s decision to keep the fed funds rate unchanged for the fourth consecutive time indicates a cautious approach to monetary policy. The key rate is currently targeted in a range between 5.25% and 5.5%, the highest in nearly 23 years.
The Fed’s decision comes at a time when inflation is decelerating, the labor market is softening, and wage growth is slowing. Private companies added just 107,000 new workers in January, below market expectations but still indicative of an expanding labor market. Additionally, the employment cost index, a gauge closely watched by the Fed for signals of inflation through wages, increased just 0.9% in the fourth quarter, the smallest increase since the second quarter of 2021.
Inflation, as measured through core personal consumption expenditures prices, rose 2.9% in December from the prior year, the lowest since March 2021. On a six- and three-month basis, core PCE prices ran at or below the Fed’s target.
The Federal Reserve’s decision to alter its investment policy for high-ranking officials and staff is another notable development. The changes expand the scope of those covered to include anyone with access to “confidential FOMC information” and may require some staff to submit brokerage statements or other documents to verify the accuracy of disclosures. These changes come in response to controversy over multiple Fed officials trading from private accounts during the early days of the Covid pandemic when the Fed was making significant policy changes.
Overall, the Federal Reserve’s decision to signal an end to interest rate hikes reflects a more cautious approach to monetary policy. While there are no immediate plans to cut rates, the Fed is closely monitoring data to gain greater confidence in inflation trends. The changes in the statement and investment policy highlight the central bank’s commitment to transparency and accountability. As the economic outlook remains uncertain, the Federal Reserve will continue to navigate the delicate balance between supporting economic growth and keeping inflation in check.