Fed Backs Off on Rate Hikes

Picture a juggler with four or five balls in the air, attempting to watch each one and time their movements precisely to keep each in motion. That visual may be a good representation of what the Federal Reserve does as it closely monitors the economy and makes decisions about interest rates.

The balls represent all of the economic indicators, geopolitical events and other information that the Fed must monitor constantly. Just as the juggler must adhere to the rules of juggling, the Fed must stick to a plan based on historical data and the opinions of its board members and what is mandated in the Federal Reserve Act.

Managing inflation and regulating banks to protect consumers are just two of the Federal Reserve’s functions. The Fed is responsible for setting monetary policy and describes this function like this: “The Federal Reserve controls the three tools of monetary policy — open market operations, the discount rate, and reserve requirements.”

The central bank lets the public know its intentions through direct comment and through hints of what it is thinking. In recent months, the Fed’s thinking and its targets have changed. The Federal Open Market Committee (FOMC) is the committee of the central bank that determines interest rates.

The FOMC’s longer-term goals are price stability and sustainable economic growth.

Rate Hikes Less Likely

As interest rates go for 2019, the FOMC has sounded like Cape Canaveral counting down for a rocket launch since last year; 3, 2, 0. Their hawkish plans have morphed into dovish plans for the year. So, what gives?

 As recently as December, the Fed had anticipated two rate hikes during 2019. In January, Fed Chairman Jerome Powell made several comments that indicated that the Fed would be flexible in the New Year, but they had perceived a slowing economy in the first quarter. That prompted them to cut their forecast for growth for the year.

The Fed needs to stave off any inflation with rate hikes. A great economy can become an overheated economy. The central bank’s target is an inflation rate of two-percent.

The threat of inflation was higher last December than the central bank perceives it to be today. In his most recent comments, Chairman Powell said; “The U.S. economy is in a good place, and we will use our monetary policy tools to keep it there.”

The Fed’s decisions have consequences. There is the hoped-for impact on the economy, which is the goal and then there is the inevitable impact on the markets, which is unintentional.

With no projected interest rate hikes for 2019, and only one planned for 2020, the Fed is hoping that the mood of investors will remain positive. Some observers are even betting on a rate cut before the end of the year. This is good news for investors, who are leery of anything that will disrupt the markets.

 If the Fed feels like they can sit on the sidelines for a while, then that means the economy is humming along to their liking.

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