The Fed Maintains Interest Rates Even As Inflation Cools

The Federal Reserve surprised no one today in announcing that it will hold the benchmark interest rates at the current 5.25% to 5.5% target range, citing a need to still keep inflation in check.

The central bank’s rate-setting group, the Federal Open Market Committee (FOMC), pointed to recent indicators showing that economic activity has slowed from its strong pace in the third quarter.

"Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low," the committee said in a statement at the conclusion of its two-day policy meeting today (December 13).

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But even though inflation has fallen from a high of 9.1% last year, it remains too high for the Fed. The committee said it remains "highly attentive to inflation risks" and that it is strongly committed to returning inflation to its 2% goal.

"The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation," the FOMC said. "The extent of these effects remains uncertain."

The committee's decision was widely expected by economists and Wall Street analysts. This is the third consecutive policy meeting in which the Fed made no changes to rates, which are at their highest level in 22 years.

"In one of the most uneventful statements this year the Fed keeps rates unchanged and remains ready to adjust policy to new information," Giuseppe Sette, president of Toggle AI, said in an emailed response to the Fed announcement. "The market rallied sharply in expectation of a dovish Fed, so the next days will show us whether this FOMC meeting will lead to a case of 'sell the news.'"

November CPI showed a 3.1% increase

Today’s move comes one day after the release of the November Consumer Price Index (CPI) report that showed a 3.1% increase from a year ago. Consumer prices remained essentially unchanged last month, as Kiplinger previously reported.

Treasury Secretary Janet Yellen, who spoke with the Wall Street Journal following release of the CPI report, said that inflation has “meaningfully” slowed. 

“I see no reason on the path that we're currently on why inflation shouldn't gradually decline to levels that are consistent with the Fed's mandate and targets,” Yellen said, according to a December 12 WSJ transcript of the talk. “Supply chain issues that resulted from the pandemic and mismatches and disruption in labor markets both seem to be healing. As that happens, inflations move down.”

In today's announcement, the FOMC also said it will continue to assess additional information and its implications for monetary policy, and that it will reduce its holdings of Treasury securities as well as agency debt and mortgage-backed securities, as previously announced.

July was the last time the FOMC raised rates, by 25 basis points (0.25%), bringing the short-term federal funds rate to the target range of 5.25% to 5.5%. It was the 11th rate hike since March 2022.

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