Fed holds interest rate steady for year end

By Alvin Wu
Business
Fed holds interest rate steady for year end

Federal Reserve Chair Jerome Powell answers reporters' questions at the Federal Open Market Committee press conference on Dec. 13, 2023. FEDERAL RESERVE/Handout

Dec. 17 (ZFJ) — The Fed maintained the target federal funds rate at 5.25-5.50% for the third time in a row on Wednesday, Dec. 13, noting that inflation has eased but is still elevated.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment,” said Federal Reserve Chair Jerome Powell. “This is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”

The federal funds rate is the interest rate at which commercial banks loan money to other banks overnight. The current high rates counter inflation by increasing the cost of borrowing money, reducing consumer and investment spending. The Federal Open Market Committee (FOMC) sets a target federal funds rate that the Fed can approach by adjusting the money supply.

The Fed has raised the policy interest rate by 5.25% since March 2022 and decreased its securities holdings by over $1 trillion in an aggressive tightening of its monetary policy to combat inflation.

“Tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening likely have not yet been felt,” said Powell.

While economic activity has slowed from the third quarter, GDP is on track to expand about 2.50% for the year as a whole with strong consumer demand and improving supply conditions. Housing sector activity is still low due to high mortgage rates. The median FOMC participant’s GDP growth projection for next year is 1.4%.

Payroll job gains averaged 204 thousand jobs per month over the past three months, and unemployment is low at 3.7%. The labor force participation rate has increased, with more individuals aged 25-54 years entering the workforce and immigration returning to pre-pandemic levels, although the labor demand is not yet met. The median FOMC participant’s unemployment rate projection for the end of next year is 4.1%.

Inflation is still above the Fed’s target of 2%. Total PCE prices rose 2.6% over the past 12 months ending in November, while core PCE prices (which exclude volatile food and energy categories) rose 3.1%.

“The lower inflation readings over the past several months are welcome, but we will need to see further evidence to build confidence that inflation is moving down sustainably toward our goal,” said Powell in his FOMC press conference.

The median FOMC projection for inflation is 2.8% this year, 2.4% next year, and 2% in 2026.

The FOMC anticipates that it will be able to reduce the interest rate in coming years, although such plans are contingent on economic data and subject to change. The median FOMC participant’s projections for the appropriate federal funds rate are 4.6% for the end of 2024, 3.6% for the end of 2025, and 2.9% for the end of 2026.

“While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table,” Powell explained.

In response to a Washington Post reporter’s question, Powell said, “I think you can say that there’s little basis for thinking that the economy is a recession now” but noted that the possibility of one occurring next year still exists.

The Fed’s announcement significantly boosted the stock market.

The Dow Jones Industrial Average rose 512.3 points (1.39%), ending at 37,090.24 on Wednesday, marking the first time it’d ever closed above 37,000—an all time record.

The NASDAQ Composite Index rose 200.56 points (1.41%), closing at 14,733.96, while the S&P 500 rose 63.39 points (1.39%), ending at 4,707.09 on Wednesday.

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