February 2023 Fed Meeting

America’s central bankers gathered for the first time this year earlier in the week.  Each year, four presidents of the Fed’s regional banks serve a 12-month term on the Federal Open Market Committee (FOMC) to help the seven governors and the President of the New York Regional Fed Bank set monetary policy, making this the first time for the current mix to decide on interest rate policy.  By most estimates the new group is thought to be less strict on inflation than the 2022 cohort.  Atlas will watch for evidence of this assertion as the year unfolds.

At a press conference on February 1, 2023, Chair Powell of the Federal Reserve discussed the current state of the economy and the Fed's policy actions to address high inflation. He noted that the economy had slowed significantly, with real GDP rising at a below-trend pace of one percent, and consumer spending, housing, and business fixed investment all showing signs of weakness. Despite this, the labor market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated. Inflation remains well above the Fed's two percent goal, and longer-term inflation expectations appear to remain well anchored. In response, the FOMC raised the policy interest rate by 25 basis points and is continuing the process of significantly reducing the size of their balance sheet. Powell emphasized that restoring price stability will likely require maintaining a restrictive stance for some time, and that the Fed will stay the course until the job is done.

Slowing economic growth in America has been a common theme at Atlas for roughly a year.  Chair Powell sees it similarly.  Nevertheless, he and his fellow committee members continued raising rates out of fear that inflation could continue plaguing the economy if they do not act further.  They’ll keep  being data dependent, but unless there is a material change in the labor market (look for more on that later this morning from the Bureau of Labor Statistics), the central bank seems to have reason to further push rates up, leaning against a potential upward price spiral because while inflation’s trend is off its high, it remains well above the FOMC’s 2.0 percent target and even above their 3.0 percent shadow target.