The Federal Reserve’s policy committee is set to meet on January 27 and 28 to discuss the nation’s monetary policy and decide whether to cut the central bank’s key interest rate for a fourth consecutive meeting. However, financial markets expect the Fed to hold interest rates steady at the January meeting. The Fed officials are torn between cutting rates to boost the faltering job market or keeping them high to subdue inflation that’s still above the Fed’s goal of a 2% annual rate.
The Federal Open Market Committee will meet to consider whether to cut the federal funds rate from its current range of 3.5% to 3.75%. The Fed has cut its interest rate by a quarter of a percentage point at each of the previous three meetings to prevent the recent job market slowdown from turning into a serious increase in unemployment. However, the Fed’s dual mandate from Congress requires it to keep inflation low and employment high, and both have been headed in the wrong direction in recent months, creating a dilemma for the Fed.
Fed officials are divided on the issue, with some advocating for rate cuts to help the job market and others pushing to keep rates high to fight inflation. Fed Chair Jerome Powell has acknowledged the challenge, stating that the Fed has one tool and cannot do two things at once. As of Monday, traders were pricing in an 80% chance that the Fed would hold steady, according to the CME Group’s FedWatch tool.
The economy is at risk of entering a state of “stagflation,” or stagnant economic growth and a poor job market combined with high inflation. The Fed aims to avoid this outcome by setting the fed funds rate appropriately. Some officials, such as Beth Hammack, president of the Federal Reserve Bank of Cleveland, believe that the Fed should hold rates steady to bring down inflation, which has been above the Fed’s target for nearly five years. On the other hand, officials like Stephen Miran are advocating for steeper rate cuts to prevent a recession.
The decision will have significant implications for the economy, as the fed funds rate influences borrowing costs on short-term loans such as credit cards and car loans, and indirectly affects rates for mortgages and other longer-term credit. Easier money generally encourages spending and boosts the economy, while higher interest rates reduce demand and push down inflation. The Fed’s decision will be closely watched, and the outcome will depend on the committee’s assessment of the economic data and the balance between inflation and employment.