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Fed Feeds Bulls

Vanguard warning mountains and valleys ahead

Image source: notbad, Olga Danylenko, Anastasiia Vasylyk - Shutterstock

What's going on?

Global investors breathed a sigh of relief on Wednesday after the US Federal Reserve (the Fed) announced it no longer plans to raise headline interest rates at all in 2019 (tweet this) – and will soon stop other measures which have the same effect.

What does this mean?

In December, the Fed said two interest rate hikes were on the cards this year – but while the US economy remains strong(ish), growth is slowing. Now, the Fed agrees with the 75% of investors who’d been predicting no hikes in 2019. It thinks taking rates for an uphill climb could hamper future economic growth by making borrowing – and therefore spending – more expensive.

The Fed also said its “run off” approach – where bonds it bought to support the economy as part of “quantitative easingaren’t replaced when they expire – would end in September. With the Fed starting to buy replacement bonds again, higher demand will raise prices and lower yields. As interest rates are linked to current bond yields, abandoning run off will lower borrowing costs. Check out our new guide to learn more about how central banks influence markets!

Why should I care?

For markets: Thumbs up from investors.

With firms now able to spend on growth more cheaply than some had expected, investors bought up stocks late on Wednesday. And the Fed’s committee members are now suggesting that the US is closer than thought to the “neutral” rate. That’s the point at which interest rates neither stymie nor artificially prop up economic growth – and further rate hikes are rainchecked completely.

The bigger picture: And then there’s trade war…

A low-tariff resolution to the US-China trade war would be a big boon to the US economy. It’s probably worrying, therefore, that negotiations have stalled. Delays will likely lengthen the list of global companies reporting disappointing earnings: late on Tuesday, FedEx followed Danish shipping giant Maersk in blaming weaker global trade for its poor results.

Originally posted as part of the Finimize daily email.

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