As inflation continues to affect American consumers, recent actions by the Federal Reserve hints at economic changes to come (Kenny Eliason, Unsplash)
From December 12-13, the Federal Reserve held a meeting on the next era of monetary policy in the U.S. While interest rates are set to stay the same for now, there have been hints of cuts coming soon, prompting economists and investors to begin preparing.
What is the Federal Reserve?
The Federal Reserve (or the Fed, for short) is the central banking system of the U.S., which places regulations and incentives on national banks. Broken into five sections, the Fed works to maximize employment, stabilize prices and interest rates, monitor other financial institutions, and protect consumers. This is done primarily through buying and selling treasury bills or changing reserve requirements and discount rates for banks. The effects of these actions are most commonly felt through changing interest rates or rising and falling employment rates.
While the Federal Reserve is connected to the U.S. government, it is not funded by tax dollars and does not seek approval from the President or Congress. It is run by a seven-person board, nominated by the president and confirmed by the Senate. With 14-year terms, this board is more permanent than most other positions in the U.S. government, insulating members from the bribery more common with individuals seeking reelection.
A Brief History of the Federal Reserve
Founded by an act of Congress in 1913, the Federal Reserve was meant to stabilize the American banking system. Before its creation, there were few ways for the government to influence the economy, especially because private commercial banks controlled banknotes. Hence, the Fed was established to create a safeguard for the U.S. economy in case of hard times.
The work of the Federal Reserve has been felt most clearly in recent years during the Great Recession of 2007-1008 and the COVID-19 pandemic. Following the Great Recession, the Fed began to implement a more expansionary monetary policy with the goal of reducing unemployment and boosting economic growth by lowering the federal funds rate. This in turn would lower other interest rates, allowing more purchases and cash flow.
More recently, expansionary monetary policy was used during the COVID-19 pandemic. The Federal Reserve cut the target federal funds rate by about 1.5 percent, began offering a forward guidance program to aid economic planning, and bought bonds to bring long-term interest rates down. While the Fed is always in action, it is rarely noticed by the average American until a drastic economic downturn forces the Fed to take more drastic measures.
Interest Rates Announcement
On December 12, a closed meeting of the Fed’s Board of Governors began in Washington D.C. In the routine two-day meeting, the Fed kept the federal interest rate constant. The last time this rate changed was in July when the interest rate increased from 5.25 to 5.50 percent, the highest level in 22 years. The committee voted unanimously to keep the interest rate constant in what many believe is the final response to the COVID-19 relief implemented in the last few years.
However, with a faster fall of inflation than predicted (almost reaching the target of two percent), there have been discussions of cuts to the interest rate in the coming months. The labor market is becoming more balanced and no longer needs the protective actions made by the Fed until now.
Looking Forward
Some economists are concerned that the status quo of high interest rates could lead to bank failures, instability in the stock market, and uncertainty of mortgage rates in the global economy. Further, with high interest rates for prolonged periods, fewer people will make purchases of cars and homes. This decreases the amount of money in circulation and sometimes causes more problems than it helps. Others are keenly aware of the danger of inflation, especially as the economy has seemed to calm in recent months. However, directly following the relief money during the COVID pandemic, many economists believe action still needs to be taken to prevent a turn for the worst.
Following the recent announcement from the Fed, the stock market made a sharp increase, with the Dow 500 closing at a record high. With an increase of almost 1.5 percent in each of the major stocks, it is clear that Wall Street believes the economy is changing. The next Fed meeting will be from January 30-31 and speculations are already being made at the upcoming announcements. Many expect the interest rates to remain stable, but those who believe that inflation is under control and worry about the negative effects on the banking sector, stock market, and trade hope that the rates will be dropped. These decisions are made on a meeting-to-meeting basis, so the decision will be unknown until the press release in January.
Sources & Further Reading
https://www.federalreserve.gov/aboutthefed.htm
https://www.federalreserve.gov/aboutthefed/boardmeetings/20231212closed.htm
https://www.federalreservehistory.org/essays/federal-reserve-history
https://www.brookings.edu/articles/fed-response-to-covid19/
https://www.federalreserve.gov/aboutthefed/boardmeetings/20231212closed.htm
https://www.wellsfargoadvisors.com/research-analysis/reports/fed-rate.htm
https://www.federalreserve.gov/monetarypolicy.htm
https://www.federalreserve.gov/monetarypolicy/fomc.htm
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20231213.pdf
https://www.cnbc.com/2023/12/13/fed-meeting-today-live-updates-on-december-fed-rate-decision.html
https://www.cnbc.com/2023/12/13/fed-interest-rate-decision-december-2023.html
https://www.jpmorgan.com/insights/outlook/economic-outlook/december-2023-fed-meeting
https://www.investopedia.com/next-fed-meeting-7551561
https://www.reuters.com/markets/us/fed-likely-hold-rates-steady-signal-couple-cuts-2024-2023-12-13/
https://www.cnn.com/economy/live-news/federal-reserve-meeting-121323/index.html