Jun 20, 2019
The Federal Reserve is No Longer ‘Patient’
The economy seems strong, but there are potential storm clouds.
The Federal Reserve left interest rates unchanged during its June meeting on Wednesday, but suggested it might cut rates later this year.
It’s the third time this year the Fed has hit the pause button, after years of gradually increasing something called the federal funds rate.
The Federal Reserve (the Fed), is the nation’s central bank, and one of its goals is to oversee the health of the nation’s financial system.
Here are more details:
- The Fed left the federal funds rate at a range between 2.25% and 2.5%.
- The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.
- When interest rates go down, consumer and business borrowing can become cheaper.
- After its interest rate decisions, the Fed typically issues a statement that many experts examine for meaning. This month’s statement dropped the word “patient” from its text, a word that appeared in May’s statement to describe the Fed’s attitude toward future interest rate hikes. By dropping the word, the Fed suggested it might consider making cuts to the federal funds rate if the economy experiences difficulty later this year, Bloomberg reported.
- The reasons for a potential rate cut are complicated, but they could include low inflation, a softening employment market, weakening global growth, the unresolved trade disputes with China and Mexico, which could act as a drag on the economy, particularly in the manufacturing sector, according to reports.
- Although the central bank is supposed to operate independently from politics, President Trump has pressured the Fed to lower interest rates, saying the rate increases over the past few years have slowed economic growth.
What does the Fed do again?
The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.
The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.
The central bank can adjust something called the federal funds rate, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages, and it even factors into the yield offered by many bonds.
The Fed has been steadily increasing interest rates since 2014. The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession.
It raised rates four times in 2018, and its current benchmark rate is between 2.25% and 2.50%. The last time the Fed raised rates was in December 2018.
What do rate changes mean for the stock market?
In December news of an interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.
When interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.
But markets also dropped in May when the Fed left rates unchanged after its last meeting.
Following the June meeting, markets increased modestly.
Check out this message about the value of long-term investing (and avoiding market noise) from Stash’s CEO Brandon Krieg.