The Fed and Interest Rates: Why Rates Aren’t Coming Down Yet

Policy Rate Unchanged [00:00]

• The Federal Reserve chose not to cut interest rates on Wednesday, January 28th.
• This decision was widely expected and not a surprise to market participants.
• The FOMC's decision to leave the policy rate unchanged was made to support progress toward maximum employment and stable prices.

Having lowered our policy rate by 75 basis points over the course of our previous three meetings, we see the current stance of monetary policy as appropriate to promote progress toward both our maximum employment and 2% inflation goals.

Economic Outlook and Labor Market Stabilization [01:36]

• Incoming data since the last meeting show clear improvement in the outlook for economic growth.
• Sentiment and Beige Book reports suggest the year is starting on a solid footing for growth.
• Inflation has performed as expected, and labor market data indicate stabilization.
• The economy is growing at a solid pace, the unemployment rate is broadly stable, and inflation remains somewhat elevated.

Well, first of all, if if you look at the incoming data since the last meeting, um, clear improvement in the outlook for growth. the the data have come in and sentiment the the beige book everything comes in suggesting that this year starts off on a on a solid footing for for growth.

Risks to Dual Mandate and Pacing of Easing [03:08]

• Risks to both the labor market and inflation have diminished.
• The upside risk to inflation has slightly decreased, as has the downside risk to employment.
• A weakening labor market would be an argument for loosening policy.
• However, if inflation were worsening simultaneously, it would create a difficult situation.
• Decisions about future meetings will be made meeting by meeting, based on incoming data and the outlook.

Uh risks to both of the variables are a little less. I think that the upside risk to inflation again a little bit less and the downside risk to employment a little less.

US Fiscal Deficit and Unsustainable Path [05:35]

• The US federal budget deficit is on an unsustainable path.
• While the current level of debt is sustainable, the trajectory is not.
• The deficit is large even at full employment, and the fiscal picture needs to be addressed but is not being effectively addressed.
• This situation could eventually lead to difficult outcomes, though not in the near term.

The US federal budget deficit is, you know, uncontroversially on an unsustainable path. The level of debt is not unsustainable. It's very much sustainable, but the path is unsustainable.

Inflation Impact on Consumers [07:09]

• Higher-income households, who own real estate and stocks, have benefited from rising asset values, which supports their spending.
• Retailers serving lower-income customers report that their consumers are economizing, trading down brands, and buying less.
• While lower-income consumers are still consuming, they are feeling the effects of inflation in a different, more broadly impactful way.

So, a couple things. one, there's something something to it in in that we know that um higher income households that tend to own real estate and tend to own stocks, you know, securities and those assets have been going up in value and and you know, increases in wealth do support spending over time.