Fed Leaves Interest Rate Unchanged, But Signals Increase ‘Soon’

January 27, 2022 by Dan McCue
<strong>Fed Leaves Interest Rate Unchanged, But Signals Increase ‘Soon’</strong>
Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, Oct. 30, 2019. (AP Photo/Susan Walsh, File)

WASHINGTON — The Federal Reserve left interest rates unchanged on Wednesday, keeping them near zero, but signaled a raise in rates could come soon if inflation continues to run above its preferred target and the job market remains strong.

The rate at which the nation’s central bank lends to other banks has now remained near zero since March 2020, coinciding with the first dark months of the coronavirus pandemic.

The statement released by the Fed today after their two-day policy meeting appears to set the stage for a rise in the interest rate as soon as the Fed’s next meeting, which is scheduled for March.

In his opening remarks before reporters at an afternoon press conference, Federal Reserve Board Chairman Jerome Powell said the central bank’s policy has always been premised on “adapting to the evolving economic environment” and it will continue to act on that premise.

“Economic activity expanded at a robust pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy financial positions of households and businesses,” Powell said. 

“Indeed, the economy has shown great strength and resilience in the face of the ongoing pandemic. The recent sharp rise in COVID cases associated with the omicron variant will surely weigh on economic growth this quarter,” he continued.

“Fortunately, health experts are finding that the omicron variant has not been as virulent as previous strains of the virus, and they expect that cases will drop off rapidly. … If the wave passes quickly, the economic effects should as well, and we would see a return to strong growth. That said, the implications for the economy remain uncertain,” Powell said.

At the moment, inflation remains well above the Fed’s long-held goal of 2%, and supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to that elevated rate. 

“In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term,” Powell said. “These problems have been larger and longer lasting than anticipated, exacerbated by waves of the virus.

“While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services. Wages have also risen briskly, and we are attentive to the risk that persistent real wage growth in excess of productivity could put upward pressure on inflation,” he continued.

“Like most forecasters, we continue to expect inflation to decline over the course of the year,” Powell said. “We believe that the best thing we can do to support continued labor market gains is to promote a long expansion and that will require price stability. 

“We are committed to our price stability goal,” the Fed chairman said. “We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched. And we will be watching carefully to see whether the economy is evolving in line with expectations.”

The Federal Reserve has already taken some steps to slay inflation, notably slowing the bond-buying program it used to support the economy throughout the pandemic.

“Of course … making appropriate monetary policy in this environment requires humility, recognizing that the economy evolves in unexpected ways,” Powell said. “We will need to be nimble so that we can respond to the full range of plausible outcomes. With this in mind, we will remain attentive to risks, including the risk that high inflation is more persistent than expected, and are prepared to respond as appropriate to achieve our goals.”

In its statement, the Federal Reserve board suggested it might begin selling off some of that government-backed debt, possibly in concert with a rise in interest rates.

Both moves would remove some of the Fed’s support from the economy, but in a related statement of principles released Wednesday, the Fed promised it will reduce its holdings in a “predictable” manner and primarily by simply adjusting how much it reinvests in assets as their terms expire.

“These high-level principles clarify that the federal funds rate is our primary means of adjusting monetary policy and that reducing our balance sheet will occur after the process of raising interest rates has begun,” Powell said, elaborating on the document. 

“Reductions will occur over time in a predictable manner primarily through adjustments to reinvestments so that securities roll off our balance sheet,” he said. “Over time, we intend to hold securities in the amounts needed for our ample reserves operating framework, and in the longer run we envision holding primarily Treasury securities. 

“Our decisions to reduce our balance sheet will be guided by our maximum employment and price stability goals. In that regard, we will be prepared to adjust any of the details of our approach to balance sheet management in light of economic and financial developments,” Powell said. 

He concluded his opening remarks by saying the Federal Open Market Committee, which guides such decisions, has not made any decisions regarding the specific timing, pace or other details of shrinking the balance sheet.

“We will discuss these matters in upcoming meetings and provide additional information at the appropriate time,” Powell said.

Dan can be reached at [email protected] and at https://twitter.com/DanMcCue

A+
a-
  • Economy
  • Federal Reserve
  • interest rates
  • Jerome Powell
  • In The News

    Health

    Voting

    Federal Reserve

    Inflation Slowed Further in December as Economic 'Soft Landing' Moves Into Sharper Focus

    WASHINGTON (AP) — The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a... Read More

    WASHINGTON (AP) — The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a trend sure to be welcomed at the White House as President Joe Biden seeks re-election in a race that could pivot on his economic stewardship. Friday’s... Read More

    US Consumers Feeling Slightly Less Confident in October

    WASHINGTON (AP) — American consumers are feeling increasingly less confident these days as fears of an oncoming recession remain elevated.... Read More

    WASHINGTON (AP) — American consumers are feeling increasingly less confident these days as fears of an oncoming recession remain elevated. The Conference Board, a business research group, said Tuesday that its consumer confidence index fell to 102.6 from 104.3 in September. The index measures both Americans’... Read More

    Stock Market Today: Wall Street Claws Back From Morning Loss to Mostly Rise

    NEW YORK (AP) — Wall Street is drifting Tuesday following the latest signal that the U.S. economy remains solid, though... Read More

    NEW YORK (AP) — Wall Street is drifting Tuesday following the latest signal that the U.S. economy remains solid, though perhaps too strong for the Federal Reserve’s liking. The S&P 500 was 0.2% higher in midday trading after erasing an early drop. The Dow Jones Industrial... Read More

    Wall Street Rises Following Updates on Consumer Confidence, Job Openings

    NEW YORK (AP) — Stocks rose in morning trading on Wall Street Tuesday as two economic reports suggested the economy... Read More

    NEW YORK (AP) — Stocks rose in morning trading on Wall Street Tuesday as two economic reports suggested the economy is cooling enough for the Federal Reserve to pause hiking interest rates. The S&P 500 rose 0.7%, adding to the weeks' early gains. The Dow Jones... Read More

    US Consumer Confidence Jumps to a Two-Year High as Inflation Eases

    WASHINGTON (AP) — U.S. consumer confidence shot to the highest level in two years this month as inflationary pressures eased... Read More

    WASHINGTON (AP) — U.S. consumer confidence shot to the highest level in two years this month as inflationary pressures eased and the American economy continued to show resilience in the face of dramatically higher interest rates. The Conference Board, a business research group, said its consumer... Read More

    Inflation Hits Lowest Point Since Early 2021 as Prices Ease for Gas, Groceries and Used Cars

    WASHINGTON (AP) — Squeezed by painfully high prices for two years, Americans have gained some much-needed relief with inflation reaching... Read More

    WASHINGTON (AP) — Squeezed by painfully high prices for two years, Americans have gained some much-needed relief with inflation reaching its lowest point since early 2021 — 3% in June compared with a year earlier — thanks in part to easing prices for gasoline, airline fares, used... Read More

    News From The Well
    scroll top