Fed ignores congressional pressure and keeps interest rates steady: CEI analysis

On Wednesday, the Federal Reserve announced that it will keep interest rates steady in a continued effort to fight off inflation. CEI senior economist Ryan Young provides his analysis on the decision.

“As usual during an election year, members of Congress are pressuring the Federal Reserve to stimulate the economy by lowering interest rates. This time the pressure is coming from more than 20 House Democrats, plus Sens. Bernie Sanders and Elizabeth Warren. The Fed is ignoring them and holding rates steady.

“The Fed showing its political independence is good news for inflation expectations, which are the primary remaining obstacle to getting inflation down to its 2 percent target rate. The Fed has already done most of what it can do in terms of monetary policy.

“It is allowing its balance sheet to draw down slowly to pre-pandemic levels, helping a swollen money supply shrink back to normal. Higher interest rates are slowing down how fast those extra dollars are circulating.

“That leaves the public’s inflation expectations as the remaining problem, and this is mostly out of the Fed’s control. A strong economy helps, as does the Fed showing some backbone. But there are two reasons markets are not yet convinced Washington’s recent good behavior will continue.

“One is that the Fed might begin lowering rates too soon; officials would like to lower rates three times this year. Restraining themselves at the Fed’s next meeting from April 30 to May 1 would send another sign of seriousness about inflation.

“The other trouble sign would be if the economy begins to slow. That would give the political branches the excuse they are looking for to enact another big spending bill. The Fed would more or less have to help finance it. This would boost inflation in the short term, while harming the Fed’s credibility in the long run.

“This is the problem the Fed ran into in the 1960s and 1970s, and it is extremely important it avoids falling into that same trap now.”