The Fed's Playbook: Analyzing the Impact of Monetary Policy on the Economy

November 6, 2023

In the world of sports, where winning and losing hang in the balance, an economic game is unfolding. The Federal Reserve, acting as the coach, is devising its strategy in the grand arena of financial markets. With inflation and economic stability on the line, each decision mirrors a pivotal play in a championship match, with investors and businesses as fans, eagerly awaiting the Fed's moves to determine the financial scoreboard.

Fed’s recent FOMC meeting: Holding Rates Steady 

Last week, all eyes were on the Fed during its Federal Open Market Committee (FOMC) meeting where they maintained rates at 5.25-5.50%. This marked the second consecutive meeting with no rate adjustments, a unanimous decision by policy members. This was expected by the markets. Stocks rose and yields fell as investors are feeling optimistic that the Fed is done with rate increases. 

Federal Reserve Chair, Jerome Powell stated in his press conference that there is no talk of rate cuts for this calendar year. The main question being addressed by policy members is if monetary policy is restrictive enough to keep inflation on a sustainable path down to 2%. Chair Powell made it clear that the Fed was willing to do what it takes to keep fighting inflation. There is one meeting left for 2023. If data suggests inflation is not continuing to trend downward, the possibility of another rate increase is still on the table. 

Labor Data

The Fed has a dual mandate to maintain price stability and maximize employment. In the current situation, a paradox emerges as the Fed desires a labor market that becomes less robust, leading to increased unemployment. This approach is aimed at reducing inflation, ultimately contributing to price stability. This past Friday, the labor data suggested that the economy is starting to cool. U.S. employers added 150,000 jobs in October, down from the previous month’s revised gain of 297,000. This is good news for investors who do not want to see rates go any higher.

A Potential Recession? 

As the Fed navigates the complex economic landscape, it aims to ensure long-term economic sustainability. In the quest to maintain stable prices and foster economic growth, interest rates are a powerful tool. However, the challenge lies in striking the right balance due to the lag in economic data available for making monetary policy decisions. The Fed understands the importance of finding the equilibrium of not doing too much or too little because both can have negative consequences. Chair Powell addressed data lags make it challenging when making decisions. While policy has been restrictive for a year now, the effects of tightening have begun to hit the consumer yet the economy has stayed resilient. 

The question Americans have asked all year is when a recession will hit. Due to strong consumer spending, third quarter gross domestic product experienced its fastest growth since 2021. As forecasts from a Wall Street Journal survey and the Federal Reserve, the economy is now projected to steer clear of a recession and effectively bring down inflation, i.e. a soft landing.

The Economic Scoreboard

The Fed's decisions have a profound impact on the financial and economic scoreboard. Their recent FOMC meeting, holding rates steady, reflects a strategic play to maintain economic stability and balance inflation. If you have any questions or concerns about this recent information, please reach out to your Wealth Management Advisor today.  Your financial success matters to us!