Today, the Federal Reserve is expected to maintain its target rate for fed funds at 5.50%, a decision echoing the stance set during the July 26, 2023 meeting.
Confidence remains high that the Fed will reinforce its position that the rate hike cycle initiated in March 2022 has reached its terminal rate. This implies that further rate hikes are unnecessary, relying instead on the lagged effects of prior increases to naturally bring down inflation to the target of 2.0%.
The primary reason for the Fed maintaining the status quo is its struggle against inflation. Despite a significant drop from 9.1% in June 2022 to 3.0% in June 2023, subsequent months saw a resurgence, with inflation reaching 3.7% in August 2023 and maintaining 3.4% in December 2023. The December oil price spike, fuelled by geopolitical tensions, adds to the complexity, threatening to prolong elevated Consumer Price Index (CPI) inflation for months.
Notably, the Fed’s decision not to cut rates or initiate a policy pivot reflects the challenge of navigating economic uncertainties. The energy price surge, compounded by geopolitical tensions, poses a unique challenge, with potential repercussions on various sectors of the economy.
The meeting will discuss the process of reducing the Fed’s balance sheet through quantitative tightening (QT), a policy objective opposite to the quantitative easing (QE) strategies of the past. While QT may serve to counter the inflation wave, it also raises concerns about its contribution to an impending recession.
In summary, the upcoming FOMC meeting is expected to be a relatively uneventful one. The Fed is likely to maintain its stance on rates, signalling a commitment to combat inflation, even as external factors pose challenges to economic stability. As the tug-of-war between economic forces continues, the resilience of inflation remains a key concern for the Federal Reserve.
Sven Franssen