The Federal Reserve acts as the U.S. central bank. It maintains an effective payment system and oversees bank operations. Kavan Choksi Finance Expert points out that investors are especially impacted by the Fed’s monetary policies. Such policies are designed to maintain price stability or manage inflation, promote maximum sustainable employment, as well as enable moderate, long-term interest rates. Fed monetary policy influences short-term interest rates. In addition to the fed funds rate, it also impacts many other forms of consumer debt like credit cards and mortgages.
Kavan Choksi Finance Expert discusses how the Fed has been managing inflation in the United States
Subsequent to raising interest rates eleven times since March 2022, the Federal Reserve elected not to hike rates again at its September 2023 meeting of the Federal Open Market Committee. Since the July of 2023, the Fed funds rate has been set in a range of between 5.25% and 5.50%. Even though inflation has declined considerably over the past year, it did stay above the Fed’s 2% goal. The Fed appears to be close to done raising interest rates, however will likely keep rates elevated well into 2024. Their approach reflects revised expectations for economic growth. The Fed acknowledged that at the moment the economy is stronger than they expected it to be, and the reason for that is the stability of the consumer.
The current rate policy of the Fed marks a shift from its “easy money” stance that was in effect dating back to the financial crisis of 2008. Over much of that period, including 2020 and 2021, the fed fund rate was set to a range of 0.00% to 0.25%. However, as inflation surged in March 2022, the Federal Reserve shifted its course. It raised rates rapidly throughout the remainder of 2022 and into 2023.
The Fed also retained its commitment in regard to the previous policy of quantitative easing (QE) that included purchases of Treasury and mortgage-backed securities. QE was focused on providing improved liquidity to capital markets. The Fed is trimming its balance sheet of such assets, from its peak near $9 trillion. This is known as the quantitative tightening” approach. This approach, along with higher interest rates, have been designed for tempering inflation by slowing economic growth through higher borrowing costs. Since early 2022, the Fed’s balance sheet declined to about $8.1 trillion, down 9.6% from its peak in April 2022, but still significant by historical standards.
As per Kavan Choksi Finance Expert, the prime challenge the Fed seeks to correct is the sudden rapid rise in the cost of living. As measured by the Consumer Price Index (CPI), headline inflation peaked at 9.1% for the 12-month period ending in June 2022, and then steadily dropped over the course of the year. CPI stood at 3.7% for the 12-month period ending in August 2023. Following the Fed’s September 2023 meeting, further emphasis is been put on Fed’s inflation-fighting focus. After all, without price stability, the economy does not work for anyone, and core inflation remains well above the headline CPI number of 3%. Core CPI is 4.3% for the 12-month period ending August 2023.