The Federal Reserve Open Market Committee (FOMC) kept the federal funds rate at the current 0% to 0.25% range and will continue to taper its asset purchases so that its Quantitative Easing (QE) program ends in March.
The Fed reiterated its language on the strength of the economy, stating that “job gains have been solid in recent months, and the unemployment rate has declined substantially.”
On inflation, the statement noted that “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”
All of the members of the FOMC voted in favor of the decision.
Key Implications
As expected, the Fed kicked the can to March 16th. Though the pressure to end emergency-levels of monetary support has risen considerably in recent months, the Fed decided to wait just a little longer to pull the trigger on rate hikes.
With consumer prices rising at 7% and the unemployment rate at 3.9%, bringing down inflation should be the primary concern of the Fed. Hiking rates has become necessary to regain price stability.
The Fed is all but guaranteed to hike its policy rate in March. From there we have the Fed hiking every three months until the policy rate gets to 2%. Clear communication to this end will help lift bond yields and slow demand, easing some of the supply/demand imbalances that are responsible for the high inflation environment that we have now.
