Federal Reserve Expected To Leave Rates Unchanged This Week
The Federal Reserve still looks on track to keep its target rate unchanged at Wednesday’s policy announcement (Jan. 29). Three reasons inform our decision.
First, TMC Research’s Fed funds model continues to indicate that the current 4.25%-to-4.50% range for the target rate is close to a neutral stance for policy.
Although the effective Fed funds rate (4.48% on a monthly basis for December and 4.33% in daily terms as of Jan. 24) is still modestly above our estimate of 4.06% (as of Jan. 24), the spread is the lowest level for the past year. That implies policy is no longer conspicuously tight (as it was in previous months), which lessens the pressure to cut rates.
Second, so-called sticky inflation data in recent months, by contrast, suggests that a new round of tightening may be warranted. But for now it’s unclear if progress on reducing inflation has temporarily stalled or is in the early stages of rebounding. Another possibility is that inflation for the near term holds more or less steady at a pace that's moderately above the Fed's 2% inflation target. As such, the central bank will probably want to see how the incoming data evolves, especially in the wake of Trump 2.0.
A third reason that the central bank will likely refrain from raising interest rates this week is the ongoing uncertainty surrounding planned policy changes by the Trump administration. On topics ranging from import tariffs to immigration and tax cuts, the president has proposed a number of far-reaching shifts from the Biden administration’s priorities. The Fed is likely waiting for more details on the administration’s preferences in terms of legislative proposals (as well as White House executive orders) before deciding if it’s prudent to adjust monetary policy.
Considering the full scope of ambiguity at the moment, leaving policy modestly tight at Wednesday’s policy announcement appears to be a reasonable choice.
Finally, one topic to monitor for Wednesday’s press conference is whether Fed Chairman Powell responds to President Trump’s comment last week that he’ll soon “demand that interest rates drop immediately.” As a possible question for the chairman, at least one reporter will almost certainly cite the quote. Whether Powell responds, or not, remains to be seen.
By James Picerno | The Milwaukee Company jpicerno@themilwaukeecompany.com
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