The Fed Leaves Rates Unchanged, But Does That Create New Problems?

The Federal Reserve has opted to keep its feet on the economic brakes for now and kept the benchmark interest rate unchanged Wednesday. 

What Happened: In its first decision of 2022, the policy making Federal Open Market Committee wrapped up its two-day meeting this afternoon by announcing it “decided to keep the target range for the federal funds rate at 0 to 0.25%.” The decision was made by a unanimous vote.

Yet the FOMC added that with “inflation well above 2% percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”

Also, the FOMC stated that it would “continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month.”

The last time the Federal Reserve raised rates was in December 2018. The FOMC began to lower rates in July 2019, citing “implications of global developments for the economic outlook as well as muted inflation pressures.” Rates were lowered further with the onset of the COVID-19 pandemic in March 2020 and have been at historic lows ever since.

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What It Means: A dramatic increase in inflation — with consumer prices rising by 7% year-over-year in December — coupled with economic uncertainties fueled by the continuing pandemic and volatile financial markets led to some speculation among Fed watchers that the central bank would begin a series of rate hikes as early as Wednesday. 

“It’s a whole lot of nothing right now,” observed Jake Clopton, president of the Chicago-based commercial mortgage brokerage Clopton Capital, who theorized the Fed was not ready to change course.

“They just didn’t want to scare anybody right now,” Clopton added. “I think they’re still on track for their first hike at the March meeting, but they didn’t want to spook the markets now.”

Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University and former director and head of asset-backed and mortgage-backed securities research at Deutsche Bank AG DB in New York City, isn’t expecting any dramatic action from the Fed when the FOMC reconvenes in March.

“It will probably be just a small rate increase of 25 basis points,” Sanders said, who warned that a minimal hike would be insufficient in view of the economic environment. “Inflation is burning out of control and the Fed is just sitting there and staring in fascination.”

But on the flip side, Sanders acknowledged that a too-dramatic rate hike might create more problems than solutions.

“Not just the U.S., but every global government has been spending like drunken sailors for the last 20 years,” he said. “The Fed can’t afford to have rates go up that much.”

Yet Dr. Peter Morici, professor emeritus of the Robert H. Smith Business School at the University of Maryland and former director of the Office of Economics at the U.S. International Trade Commission, warned that inaction on rates cannot continue much longer and questioned whether Fed Chairman Jerome Powell understood the gravity of the situation.

“They think the sickness will cure itself and it will not,” he said. “We’ve never had this type of inflation being tamed without an economic slowdown.”

Photo: 401(k) 2012 Flickr Creative Commons.