Fed Maintains Rates, Keeps Sights Set On 2% Inflation Target

The nation’s benchmark interest rates will hold steady at the current 5.25% to 5.5% range as the inflation target of 2% remains the goal, the Federal Open Market Committee (FOMC) announced today (January 31).

“The committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the committee remains highly attentive to inflation risks,” the FOMC, the central bank’s rate-setting group, said in a statement at the end of its two-day monetary policy meeting. This is the fourth consecutive meeting in which the FOMC has left rates unchanged. 

Recent indicators show that economic activity has expanded at a solid pace, the committee said. While job gains have moderated since early last year, they remain strong, and the unemployment rate remains low, it said. 

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Inflation has also eased over the past year but remains high, the FOMC said. Before adjusting the target range for the federal funds rate, the committee “will carefully assess incoming data, the evolving outlook and the balance of risks,” it said, adding that it does not expect to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.

 The move follows last week’s announcement that the nation’s fourth-quarter gross domestic product (GDP) grew 3.3%, which indicates that the economy has not lost momentum yet, according to Kiplinger’s GDP Outlook report.

Treasury Secretary Janet Yellen commented on the strong growth in a speech on the state of the economy in Chicago last week. The economy now produces more goods and services than it did before the COVID-19 pandemic, Yellen said. Recent data shows strong economic growth last year, including in the last quarter. “At the same time, inflation has come down significantly,” she said.

Consumer sentiment has increased by 29% since November and is now at its highest level since 2021, Yellen said, adding that the labor market is healthy. This has been “the fairest recovery on record,” she said.

Federal Reserve Chairman Jerome Powell is set to provide more details on the FOMC decision at his subsequent press conference.

The committee's decision surprised no one on Wall Street.

“As anticipated, the Federal Reserve has shifted its stance from a hiking bias to a data-dependent approach. With steady economic growth, it is expected that policymakers will wait for more evidence of a sustained downtrend in inflation before making any changes,” said Whitney Watson, global co-head and co-chief investment officer of Fixed Income and Liquidity Solutions within Goldman Sachs Asset Management.

 “The market's expectation of a 50% probability of a rate cut by March seems reasonable, given the recent positive signals from the Fed's preferred measures of inflation and wage growth,” Watson added.

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