Fed Leaves Rates Unchanged, Offers No Clear Timetable to Cool Inflation to 2%

Brian Turner
01 Nov, 2023
New York City

Treasury yields for longer-dated maturities edged slightly higher after the Federal Reserve left rates unchanged but left the door open for a rate hike at the next meeting.

Policymakers are struggling to lower the inflation rate to 3% while keeping economic growth intact and navigating tight labor market conditions.

Historically, when interest rates rise rapidly, the labor market cools and economic growth slows, but the latest rate tightening cycle has had little impact on the labor market and economic growth.

The Federal Reserve has increased rates over the last eighteen months from near zero to close to 5.5%, and the U.S. economy has managed to avoid a much-foreseen economic slowdown or a recession.

Policymakers are still struggling to cool inflation, which has weakened in the last eleven months, but prices are still rising faster than the 2% target rate set by the central bank.

The Federal Reserve is struggling to understand the cumulative effects of 500 basis points of rate increases and the lags with which rate hikes affect economic activities, inflation, and economic and financial developments.

Inflation is still high because supply chain disruption-driven price hikes are cooling, helping the inflation to moderate, but demand-driven inflation is still fueling inflationary pressures.

While the Fed talks about cooling inflation, it also fans the fires of inflation by purchasing large chunks of federal government debt, which is fueling inflationary forces.

The U.S. Treasury Department is planning to auction $112 billion in debt next week as the federal government prepares to finance its rising debt, which reached $33.7 trillion at the end of October.

The federal government increased its deficit by 23.2%, or $320 billion, to $1.7 trillion in the fiscal year 2023 ending in September, and the federal deficit is expected to approach $2 trillion in the current fiscal year if the government continues to spend at its current levels.

The White House is seeking $106 billion to finance wars in Israel and Ukraine, and the president's office is looking for an additional $56 billion for childcare and disaster relief.

 

Fed Leaves Rates Unchanged, Sets No Timetable to Lower Inflation

The Federal Reserve held the fed funds rate range at a 22-year high between 5.25% and 5.50% for the second time in a row and left the door open for another rate hike to cool inflationary pressure.

The central bank's move was widely anticipated, but policymakers failed to provide a definite timetable for bringing down inflation to the target rate of 2%.