The Federal Reserve has kept its feet on the economic brakes for now, and it has kept the benchmark interest rate unchanged Wednesday.
What Happened: In its first decision of 2022, the policy making Federal Open Market Committee wrapped up its two-day meeting this afternoon by announcing it would keep the target range for the federal funds rate at 0 to 0.25%. The decision was made by a unanimous vote.
The FOMC expects that with inflation well above 2% percent and a strong labor market, the Committee believes it will be appropriate to raise the target range for the federal funds rate. The FOMC stated that it would continue to reduce the monthly pace of net asset purchases, bringing it to an end in early March. The Committee will increase its holdings of Treasury securities by at least $20 billion a month and agency mortgage backed securities by at least $10 billion per month beginning in February. The last time the Federal Reserve raised rates was in December 2018. The FOMC started to lower rates in July 2019, citing the implications of global developments for the economic outlook as well as muted inflation pressures. Rates were lowered further with the onset of the COVID 19 pandemic in March 2020 and have been at historic lows ever since.
What It Means: A dramatic increase in inflation with consumer prices rising by 7% year-over-year in December - coupled with economic uncertainties fueled by the continuing Pandemic and volatile financial markets, led to speculation among Fed watchers that the central bank would begin a series of rate hikes as early as Wednesday.
Jake Clopton, president of Chicago-based commercial mortgage brokerage Clopton Capital, said the Fed was not ready to change course.
Clopton said that they just didn't want to scare anybody right now. I think they are still on the right path for their first hike at the March meeting, but they didn't want to spook the markets now. Anthony B. Sanders, professor of real estate finance at George Mason University and former director and head of asset-backed and mortgage-backed securities research at Deutsche Bank AG NYSE: DB in New York City, isn't expecting a dramatic action from the Fed when the FOMC reconvenes in March.
The minimal hike would be insufficient in view of the economic environment, and Sanders said it would be just a small rate increase of 25 basis points. Inflation is out of control and the Fed is sitting there and staring at the same time. Sanders acknowledged that a too-dramatic rate hike could cause more problems than solutions.
He said that the U.S. and the global government have been spending like drunken sailors for the last 20 years. The Fed can't afford to have rates go up that much. Professor Peter Morici, professor emeritus at the University of Maryland, and former Director of the Office of Economics at the U.S. International Trade Commission, warned that inaction on rates cannot continue much longer and questioned whether Fed Chairman Jerome Powell understood the gravity of the situation.
He said they think the sickness will cure itself, and he said it will not. We've never had this type of inflation before, without an economic slowdown.