Welcome to the first Federal Reserve monetary policy meeting under Jerome Powell, who now serves as Fed Chief. The Federal Reserve’s decision is in and it seems that the markets have already begun digesting the results. Although the Fed stuck to a relatively cautious strategy regarding US rates, some officials hinted that they may be just a little more worried about inflationary pressure than they let on.
As broadly expected, key U.S interest rates were lifted yesterday by a quarter percentage point, but it seems that the “three 2018 hikes” story hasn’t changed – for now. Yesterday’s rate hike marks the sixth-quarter percentage point move since 2015. The Fed’s unchanged outlook for 2018’s monetary policy came as a surprise to most analysts, as they were widely anticipating the Fed to at least pencil in a fourth-rate hike, as a result of a robust labor market and higher inflation. It appears the American economy is growing, slowly but surely.
What was really talked about on Wall Street though, was the mixed signals that the Fed was giving out. Basically, it was Fed-Hawks VS Fed-Doves, with the doves ruling the roost for the time being. Allow me to explain. Seven out of fifteen Fed policymakers are actually in favor of a fourth rate hike this year saying that ” economic outlook has strengthened in recent months.” That’s quite a change from last time’s vote when only four board members wanted a fourth rate hike. Having laid this down, a fourth rate hike is not, ‘not’penciled in. We could see the number of hikes grow as the U.S economy continues to expand at a faster pace than expected along with continually falling unemployment.
But shall we look at it from the Fed’s perspective too? Is their willingness to ‘tolerate’ continually rising inflation really such a surprise? Since 2009’s Economic Recession, inflation hasn’t quite recovered and is still relatively low – at least by historical standards. The combination of sluggish economic growth with low inflation could perhaps be the reason the Central Bank “has steadily reduced its longer-run fed funds target since 2012.” I mean, after all, let’s not forget that six years ago rates were at an insane 4.25% before forecasts for the short-term were revised to 2.9%. I guess you could call this the ‘pivotal’ number of interest rates, as it would neither stimulate nor slow down the U.S economy.
The conclusion? Well, the Fed evidently wants to find “the middle ground” on how to raise rates fast without disrupting ongoing economic expansion. Will there be a fourth-rate hike? Who knows, but one thing is for sure, with America being a consumer-driven economy, affordable rates could make or break this quarter’s GDP report.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.