0.25% Rate Hike, The Impact of the Federal Reserve's Monetary Policy Decision on the U.S. Economy - March 22, 2023

 

On March 22, 2023, the Federal Open Market Committee (FOMC) announced its decision to raise the target range for the federal funds rate to 4-3/4 to 5 percent. This decision was made based on recent indicators of modest growth in spending and production, robust job gains, and elevated inflation. The FOMC's goal is to achieve maximum employment and inflation at the rate of 2 percent over the longer run.

In support of these goals, the FOMC directed the Open Market Desk at the Federal Reserve Bank of New York to undertake open market operations as necessary to maintain the federal funds rate in the target range of 4-3/4 to 5 percent. Additionally, the FOMC directed the Desk to conduct standing overnight repurchase agreement operations with a minimum bid rate of 5 percent and with an aggregate operation limit of $500 billion. The FOMC also directed the Desk to conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.8 percent and with a per-counterparty limit of $160 billion per day.

The FOMC also decided to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. The FOMC will redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. The FOMC also decided to reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.

The FOMC's decision to raise the target range for the federal funds rate and implement other policy measures is likely to result in tighter credit conditions for households and businesses. This could weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain, and the FOMC will closely monitor incoming information and assess the implications for monetary policy.

The FOMC's decision to raise the interest rate paid on reserve balances to 4.9 percent and increase the primary credit rate to 5 percent is likely to have an impact on the U.S. economy. Higher interest rates could lead to lower borrowing and spending by households and businesses, which could slow economic growth. However, higher interest rates could also help to control inflation, which could be beneficial for the economy in the long run.

In addition to its policy decisions, the FOMC will continue to monitor the implications of incoming information for the economic outlook. The FOMC would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the FOMC's goals.

Overall, the FOMC's monetary policy decision is an important step towards achieving its goals of maximum employment and inflation at the rate of 2 percent over the longer run. However, the impact of this decision on the U.S. economy remains uncertain, and the FOMC will continue to closely monitor economic and financial developments to ensure that its policy stance remains appropriate.