Key points:

  • The Federal Open Market Committee voted today to keep its target Federal Funds Rate unchanged at 3.50% to 3.75%, in line with market expectations.
  • The decision comes against a backdrop of surging gas prices and an already weakening labor market.
  • Going forward, monetary policy may be heavily dependent on geopolitical factors outside of the Fed’s control.

The FOMC voted today to keep its target federal funds rate unchanged, as it tries to balance a war-driven energy price shock with a weakening labor market. Although the move was widely expected, it underscores the difficult path ahead for the Fed, which now faces pressure on both sides of its dual mandate to keep employment high and inflation muted. Complicating matters further is the fact that Fed leaders are often basing hugely important decisions on weeks- or months-old data that may not fully capture the magnitude of rapid economic shifts, raising the risk that decisions may come too late or be based on outdated assumptions. 

Gas prices have jumped 27% over the past four weeks, which, even holding all other prices equal, will undoubtedly push overall inflation up in the coming months, but we won’t have data that shows the true impact for quite some time. Additionally, new PPI data released today showed that producer prices — costs faced by companies at the production and wholesale phase — rose more than twice as fast as expected last month. Meanwhile, the labor market continued to show cracks in February, as nonfarm payrolls fell by 92,000 jobs and downward revisions reversed some of January’s gains. 

These dynamics make it incredibly difficult to predict future monetary policy decisions. In the Committee’s summary of economic projections, which indicates each member’s base case, the most common response was either 1 or 0 cuts this year. Still, with so much uncertainty, this outcome is far from guaranteed. Energy price shocks affect the prices of all goods and services. If price increases become entrenched, the Fed may be forced to raise rates to prevent a stagflationary spiral, even if doing so means weakening the labor market. The Fed’s balancing act is getting trickier, and an upcoming change in leadership this spring when Jerome Powell’s term as chair ends will only add to the uncertainty as his successor tries to build — or simply maintain — some semblance of unity amongst committee members.