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Eye on the Fed

Economic Policy Brief #TBA | By: Greg Ziegler | January 31, 2022

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Policy Summary

The Federal Open Market Committee (FOMC) concluded the first of its eight scheduled meetings for 2022 on Wednesday, January 26th.  The Committee is comprised of twelve members and is responsible for overseeing the nation’s monetary policy to promote the nation’s economic goals.  At the conclusion of its meeting the Committee issued a press release summarizing the key points the Committee considered in its deliberations stating that, “indicators of economic activity and employment have continued to strengthen,” and that, “job gains have been solid in recent months, and the unemployment rate has declined substantially.” Further, the Committee communicated the actions it would take, stating that it, “seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent.”  The Committee conceded 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.”

Policy Analysis

The Federal Reserve rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.  This rate serves as a key tool that the Fed uses to impact economic policy. By lowering this rate, the Federal Reserve makes it easier to borrow, which increases consumer borrowing, which in turn increases consumer spending, which may contribute to the economy growing too quickly, which can increase inflation. Doing the reverse, raising the Federal Reserve rate, makes it more expensive to borrow, which should lead to less consumer borrowing and spending, while the reduction in spending should slow the growth of the economy and lead to an inflation reduction.

Currently, the Inflation rate is 7% which is the highest it’s been in the last 40 years (10.3% in 1981), making the FOMC’s decision to leave the rate unchanged mildly surprising as it takes time for rate changes to achieve their desired effect.  The Committee did hedge its bets and say that it is likely that they will raise the interest rate at their next meeting in March (March 15th and 16th).

The two ingredients of a healthy economy. 

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The Federal Reserve Bank of San Francisco

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The stock market showed some volatility leading up to the Fed’s decision on the Federal Reserve rate.  The Dow was down 920 points intraday on Monday the 24th, and down over 640 points intraday both Tuesday and Wednesday, closing down over 350 points on Wednesday, before rallying to finish up 590 points on Friday.  For the week the Dow Jones Industrial Average closed up 1.92%.  Similarly, the S&P 500 Index closed down 58 points on Wednesday and 54 points on Thursday before rallying to close up 95 points on Friday.  For the week the S&P Index closed up 1.73%.

Engagement Resources​

Click or tap on resource URL to visit links where available 

Federal Open Market Committee Meeting Press Release

https://www.federalreserve.gov/monetarypolicy/fomc.htm

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