US Fed Keeps Rates At 22-Year High; Warns About Tighter Financial, Credit Conditions For Inflation Risks

US Federal Reserve decided to keep rates at 22-year for the second consecutive monetary policy. FOMC said the committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent. Through its rates decision, the US Fed seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run.

On Wednesday, FOMC pointed out that recent indicators suggest that economic activity expanded at a strong pace in the third quarter, while job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low.

Further, FOMC highlighted that the US banking system is sound and resilient. The committee believes tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.

However, the extent of these effects remains uncertain, it added. FOMC remains highly attentive to inflation risks.

This is why, despite the US inflation rate remaining steady at 3.7% in September 2023, FOMC said, "inflation remains elevated."

According to the statement, FOMC will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time.

FOMC said it takes into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Additionally, it will continue reducing its holdings of Treasury securities agency debt and agency mortgage-backed securities, as described in its previously announced plans.

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

The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments, it said.

Apart from this, as part of its policy decision, the Federal Open Market Committee voted to direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account.

Effective November 2, 2023, the Federal Open Market Committee directs the Desk to:

- Undertake open market operations as necessary to maintain the federal funds rate in a target range of 5-1/4 to 5-1/2 per cent.

- Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 per cent and with an aggregate operation limit of $500 billion.

- Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 per cent and with a per-counterparty limit of $160 billion per
day.

- 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. 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.

- 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.

- Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.

- Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions.