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Fed Taking Things Slowly


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What's going on?

New US Federal Reserve (“the Fed”) Chair Jerome Powell delivered his first speech in office on Friday, saying he expects interest rates to rise gradually over the course of 2018. He also offered an explanation for why inflation hasn’t picked up – in a word, Amazon.

What does this mean?

Powell’s avowal that gradual interest rate increases is the best course of action follows a US jobs report on Friday that showed wage growth (a measure of inflation) didn’t pick up meaningfully in March – it remained at roughly the same level as in recent months.

The Fed boss went on to suggest that the growth of ecommerce might be responsible for putting a damper on inflation in prices. In a world where consumers increasingly shop online for the best deals, retailers are more hesitant to raise prices in case they lose customers (indeed, several are cutting them). It’s difficult to prove, though, because nobody can say what might have happened if ecommerce had remained but a twinkle in Jeff Bezos’ eye.

Why should I care?

For markets: It’s “slow and steady wins the race” for interest rates.

While some had hoped that higher inflation would force the Fed to increase rates sooner and faster than expected (including the head honcho at JPMorgan), that now looks unlikely. The Fed has raised interest rates once already this year and most investors expect it to raise them twice more in 2018.

For you personally: Thanks to ecommerce, prices are staying low.

The meteoric rise of online retail companies has seen traditional players having to restructure or shut poorly performing stores in order to free up cash to invest in lower prices and better convenience (like faster delivery options) for customers. In some cases, retailers have closed down altogether. Consumers have, for now, been the winners, benefiting from falling prices in most retail categories. Companies that have invested in setting and keeping low prices, like Amazon and ASOS in the online world and Lidl and Primark offline, are reaping the rewards of customers spending more with them.

Originally posted as part of the Finimize daily email.

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