The US Federal Reserve held rates steady today following a meeting of the Federal Open Market Committee (FOMC). While inflation remains stubbornly high and economic activity robust, the Fed decided it was better to wait and see if the following months of rapid rate increases would eventually slow the economy – its intended goal.
The FOMC said it would maintain the target range for the federal funds rate at 5-1/4 to 5-1/2% as it attempts to push inflation down to its 2% target.
The FOMC said that recent indicators suggest that economic activity expanded at a strong pace in the third quarter, and jobs remained strong but not as strong as last year.
The Fed noted that high rates were impacting both households and businesses and would likely “weigh on economic activity” in the coming months.
At the same time, the Fed did not indicate if they were inclined to increase rates again or hold steady at their next meeting as they will be data-driven – even while some point to solid economic activity as a sign that more rate increases are needed.
The elephant in the room is the fact that while monetary policy is trying desperately to slow the economy, fiscal policy is doing the opposite.
The first couple years of the Biden Administration have seen almost $5 trillion of spending. During the Trump years, the federal government spent a whopping $7.8 trillion. While there is an argument that some of the Trump expenditures were necessary, it is hard to justify the trillions spent during the last year of his Administration. All of this money takes time to filter through to the real world, but inflation is one of the results.
And then there is the debt servicing that is getting bigger by the second. Every time rates go up, the federal government needs to raise more money to cover the interest.
The FOMC said it will continue to monitor the implications of incoming information, and it is prepared to adjust the stance of monetary policy as appropriate if risks emerge. While the Fed will do its job, it is unclear if the elected officials possess the same resolve.