Fed’s Policymaking Arm Chooses to Keep Interest Rates Unchanged
Chicago Federal Reserve Bank President Austan Goolsbee emphasized on Sunday that the battle against inflation is far from over, despite positive signs indicating a decrease in inflationary pressures without triggering a recession. The Federal Open Market Committee (FOMC), responsible for setting monetary policy, recently decided against a rate hike, instead opting to maintain the benchmark federal funds rate at a range of 5.25% to 5.5% – the highest level in 22 years.
Caution Remains as Inflation Targets are Yet to be Met
The Federal Reserve aggressively raised interest rates last year to curb inflation, which peaked at a four-decade high of 9.1% in June 2022. Since then, inflation has gradually declined to 3.1% in November, although still above the Fed’s target of 2%. Speaking on CBS’ “Face the Nation,” Goolsbee explained that while progress has been made, it is premature to declare victory. He referenced past experiences where reducing inflation has been accompanied by major recessions.
Economic Data and Geopolitical Risks Pose Challenges
Goolsbee acknowledged concerning economic data, including a 12% year-over-year increase in homelessness and rising delinquencies in credit card debt, auto lending, and small business lending. He also highlighted geopolitical risks such as the war in Ukraine and the conflict between Hamas and Israel, which could have a negative impact on the economy. Additionally, Goolsbee expressed concerns about a potential major supply shock if oil prices were to rise substantially or if there were disruptions in China’s economy or the banking sector in the United States.
Expectations for Interest Rate Cuts
At the recent policy meeting, the Federal Reserve’s economic projections indicated that a majority of policymakers foresee interest rates declining to 4.6% by the end of 2024. This suggests the possibility of at least three quarter-point rate cuts in the coming year, with no expectations of interest rate increases. Policymakers also mentioned additional rate cuts in 2025 and 2026.
Fed’s Stance on Inflation and Future Rate Hikes
The FOMC acknowledged in a statement that while inflation has eased over the past year, it remains elevated. The committee stated its intention to monitor the economy and assess the need for any additional rate hikes. Federal Reserve Chairman Jerome Powell clarified that although the peak rate for this cycle is likely near, the possibility of further hikes has not been ruled out.
Conclusion
Chicago Federal Reserve Bank President Austan Goolsbee emphasized that progress has been made in reducing inflation, but caution is necessary as targets are yet to be met. Economic data, geopolitical risks, and the potential for external shocks pose challenges to the economy. The Federal Reserve anticipates interest rate cuts in the coming years but remains vigilant in assessing the need for further adjustments.
