The United States Federal Reserve is the entity that dictates monetary policy in the United States using a mixture of adjustments to the federal funds rate and discount rate, as well as open market operations. The FOMC, Federal Open Market Committee, holds eight regularly scheduled meetings per year, and the minutes from these meetings are made available to the public 3 weeks after the meeting.
The Federal Reserve Press conference in January from Federal Reserve Chair Powell went over a few primary points as follows. Firstly, Chair Powell went over the duel mandate of the Federal Reserve, to maintain stable prices while maximizing employment. This constitutes the primary goal of the Federal Reserve, and the monetary policy dictated by the Federal Reserve during the January press conference were overall conservative, but optimistic. More specifically, the Federal Funds rate and discount rate were to be maintained at between 5.25% and 5.5%, which is much higher then usual, to combat inflation and maintain stable prices. However, Chair Powell stated that rate cuts were likely this year, but that they needed more confidence that inflation was decreasing first. Additionally, the Federal Reserve allowed 1.3 trillion dollar’s worth of treasury bonds and mortgage backed securities to mature without replacing them, a process known as “rolling off” the securities. This process is also known as quantitative tightening, a component of monetary policy that is used by central banks to decrease liquidity. These monetary policy actions are in line with enforcing the duel mandate, through maintaining a high discount rate and federal funds rate, as well as shrinking the federal reserves balance sheet through quantitative tightening, the Federal reserve is utilizing contractionary monetary policy to combat high inflation rates in the wake of the financial crises of 2022.
The march FOMC meeting brought similar news, with the same emphasis on maintaining the duel mandate. This was pretty directly predicted during the questionnaire portion of the January press release, in which Chair Powell states that it is “unlikely” that there will be rate cuts. The Committee decided to maintain the current high discount and federal funds rates, as well as continue to institute balance sheet shrinkage through rolling off securities. The committee once again emphasized the lack of confidence in sustainable inflation decreases, as well a strong commitment to returning inflation to its 2% objective from its march rate of 3.5%. This maintenance of contractionary monetary policy decisions makes sense in light of the consistently high inflation rates and reasonably strong economic growth. The reduction of central bank liquidity through balance sheet shrinkage also works to counteract the excess of central bank liquidity generated during the COVID-19 pandemic created to stimulate the economy, now that things are returning to normal there is no longer a need for more drastic measures to bolster the economy, but rather to control inflation and maintain price levels. The duel mandate is a careful balance, and the the needle has swung from a concern about the economy stalling during the pandemic to high price inflation in the wake. This has led the Federal reserve to work primarily on reducing inflation, with the concern for economic growth and stability taking a temporary backseat.
Two interesting questions brought up during the question-asking portion of the January FOMC committee meeting include a question brought up by the reporter from the Washington Post, Rachel Siegel. Ms. Sigel asked about what indicators the Federal reserve uses to gauge the current state of the economy, and specifically what indicators the Federal reserve is using this year to gauge the current state of the economy. Chair Powell states that contrary to the pandemic, where more unconventional methods of gauging the economy were used, they are now able to use more conventional indicators such as housing and goods inflation and wages. Another interesting question comes from Edward Lawrence, of Fox Business, who very directly asked if if was premature to presume that rate cuts were right around the corner. Chair Powell responds in turn that it is unlikely that the committee will decide that rate cuts will happen in March, indirectly answering Mr Lawrence’s question, and also proving to be correct from the information in the March FOMC release.