In a meeting held on January 28th, the Federal Reserve decided to keep interest rates steady.

Interest rates have been reduced three times since September.  But two major factors affected the Fed’s decision on the 28th.  

One was the continued uncertainties in the market and the economy.  The other is the impact of the change in policies by a new President.  

Those factors convinced the Fed to hold interest rates steady.  

The marketplace uncertainties included the fact that while the level of inflation has been brought lower, it is still occurring.  

Maintaining the inflation rate at two percent has historically been the Fed’s goal for many years; that seems to be the rate most acceptable to governments, businesses, and consumers.

When Congress and the President enact legislation which increases spending beyond taxes collected, inflation occurs.  

That occurred in 2022, when President Biden’s Inflation Reduction Act caused inflation to zoom higher.  The Fed was forced to rein in inflation by correspondingly increasing interest rates.

Inflation has been slowly reduced as a result, and starting in September the Fed began to reduce interest rates.  Reducing interest rates promotes real economic growth.

But Federal overspending has continued.  The ongoing actions resulting from Biden’s Inflation Reduction Act are still affecting the economy.  As a result, inflation continues to be an issue; it is not yet fully under control.  

As a result, the Fed has necessarily chosen not to reduce interest rates any further for now.  

Too, the fact that this month brings in a new President complicates the set of issues the Federal Reserve must consider in making its decision.  What will President Trump do?  Will he take action that will stoke the likelihood for further inflation?  Nobody can give an answer to that question with any significant degree of confidence.  

Whether President Trump’s actions are good or bad for Americans generally does not necessarily coincide with the impact those actions will have on inflation.  Even good actions can worsen inflation.

The Federal Reserve was created to address three objectives:  to maximize employment, to stabilize prices, and to moderate long-term interest rates.  Maximizing employment assures a healthy economy.  Stabilizing prices and moderating long-term interest rates are addressed by keeping inflation (and deflation, if that were a problem) in check.

The opposite would be substantial disruptions to the American economy – which is bad for both businesses and the livelihood of families.  

History is littered with such disruptions caused by Presidents of both political parties.  Unsurprisingly, Presidents and Congresses have often acted without an understanding of all the consequences of those actions.  

The Federal Reserve was created to prevent or at least moderate those economic disruptions.  Controlling interest rates is the Fed’s primary tool to that end.

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