21May

TAKING A HIKE; A NEW FED CHAIRMAN STEPS IN

After several years of keeping the federal funds rate near zero, the drama around meetings of the Federal Reserve’s Federal Open Market Committee (FOMC) has increased and garnered more attention. With hints of impending inflation, and unemployment numbers looking much better, the stage has been set for more intervention by the central bank.

The variables that the Fed watches, and often acts on, have seen changes, and with economic improvement, often comes an economy that might be improving too fast.

The Fed uses several “tools” to help keep the economy healthy and raising the benchmark rate is just one of them.

On March 21, 2018, after their FOMC meeting, the Fed announced a quarter point rate increase. The news immediately affected the markets, causing some intra-day volatility. The news out of the meeting was mostly positive though, with an expectation of some manageable inflation and affirmation of a growing economy.

It is anticipated that interest rates on revolving credit and home loans will go up as a result. This follows strong increases in existing home sales in recent months. This rate hike was the sixth during this current cycle of rate hikes, increasing the federal funds rate from near zero to a range of 1.5-1.75 percent.

The Federal Reserve’s target inflation rate is 2 percent. They also have an objective of maximum employment. Those are just two variables monitored by the Fed that influence their policies.

New Chair to Watch

This recent FOMC meeting was the first since Jerome Powell’s confirmation as the new chair of the Federal Reserve. The positioning of the Fed is seen as more hawkish currently as he anticipates a couple of more rate hikes this year.

The news out of the meeting reinforced the Fed’s previous guidance that they anticipated three rate hikes during all of 2018.

Powell addressed the House Financial Services Committee on February 27, 2018. The public comments of the chair of the Fed, along with the results of FOMC meetings, often impact government bond yields and the stock market .

Next year could see a more aggressive approach, with the Fed forecasting an additional three rate hikes in 2019. The Fed’s current projection is that the federal funds rate could stand at 2.9 percent by year end next year.

What this all means for savers is that there should be some incremental increases in savings account interest. On the flip side, those who carry debt should also see an increase in rates as well. Since U.S. consumers added $92 billion in new debt in 2017, and the average credit-card interest rate is already 16.8 percent, the impact of the Fed hikes will sting those who carry ongoing debt.

What happens when the central bank meets can impact all Americans. With a strengthening economy, there are new concerns that can arise. The Federal Reserve monitors these changes and attempts to take actions that will counteract them. For now, both the actions of the Fed, and the stock market, have returned to more of a “normal” state of reality.


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