Freeze Frame

Fed freezes rates

Image source: Sergey Uryadnikov, Avesun, Yeti studio - Shutterstock

What's going on?

The Federal Reserve said it would freeze the key US interest rate in place on Wednesday – although it conceded that rates might ultimately trickle downward this year (tweet this).

What does this mean?

There’s been much consternation among investors about which way the US central bank would go. On the one hand, recent data has shown improving consumer spending, super-low unemployment, and American factory output picking back up – suggesting an economy on a solid footing. On the other hand, slowing wage increases coupled with growing global trade conflict may necessitate lower rates to sustain US economic growth.

The Fed held steady. But looking at individual committee members’ expectations for future interest rate movements, it’s now more likely to cut rates this year than it was in March – primarily thanks to increased economic uncertainty.

Why should I care?

For markets: Much ado about nothing.

US stocks have fallen straight after every Fed update bar one since March 2018, so their initial rise on Wednesday, albeit slight, was perhaps a surprise. Investors have also been buying up government bonds of late, anticipating central bank interest rate cuts to come: the Fed’s acknowledgment that such declines may now indeed be on the way appears to have vindicated them. Some may find it peculiar that the Fed hinted at a need for future rate cuts without actually doing anything about it on Wednesday. But then again, central banks don’t have the best reputation for acting preemptively…

The bigger picture: So much for the battle; now comes the war.

Lower interest rates typically bring down the value of a country’s currency – making exports appear cheaper to foreign buyers. That may be one factor behind the US president’s calls for the Fed to cut rates: if the US can’t tariff its way into an improved “trade balance”, it could instead benefit from a weaker dollar cheapening American products compared to Chinese and European rivals’ – and beat them at their own alleged game.

Originally posted as part of the Finimize daily email.

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