What the Fed’s New Strategy Reveals about Market Conditions
The Fed ’s latest meeting reveals no change to the interest rates and also indicates its optimism on the growth of the economy.
With direct market access trading offered by online broker dealers, trading in the stock market has become a lot more accessible for the public. But the stock market is also influenced by various political, financial and economic factors of the nation as well as the international markets. One important economic factor is the interest rates set by the US Federal Reserve (Fed).
Fed Stays Away from Interest Rate Changes
Interest rates have been left unchanged by the Fed. In its meeting on Wednesday, May 1, the Fed also displayed a lack of intention to adjust the rates any time in the near future. They have found the rising economic gains and jobs, plus the possibility of the weak inflation rising higher, encouraging. With the expansion in the US economy heading to its 10th year, the Fed reckons the aforementioned factors are the likeliest outcomes. Chairman Jerome Powell claimed to have seen no sense in raising or reducing the rates. This comes after President Trump had asked for a full percentage point rate cut as part of efforts to get the economy stimulated.
How the Markets Reacted
So how did the Fed’s decision influence the markets? There was a mild selloff on Wednesday. The bond yields were also pushed higher. There was a 0.75% drop in the S&P 500. That has been the largest daily decline it has experienced since the middle of March. There was also a direction change for interest rate futures. It was probably an indication of lesser confidence on a rate cut by the Fed as the next move, which some analysts believe was what Powell was indicating in his message.
The Fed wanted its federal funds rate to stay in the present target band. So it has slightly reduced the excess reserve interest it pays the banks from 2.40% to 2.35%.
Concern over the Muted Inflation Level
The Fed’s policy statement displayed the primary concern of the level of inflation being muted. It is continuing to fail to reach the 2 percent target of the Fed. There was the suggestion that a recent inflation decline could continue for longer than expected and that the drop in energy prices couldn’t be the only factor for that.
Data available most recently revealed the underlying inflation to be at 1.6%. That could be considered an issue if it indicated that businesses and households were doubtful about the strength of the economy and, as a result, were hesitant to invest and spend. But Powell opined that the core inflation decline was probably the result of momentary factors which wouldn’t hold much influence for too long and that the inflation would get back to the target of 2%. Powell indicated that the Fed would observe the inflation rate more closely and, if it was consistently running below the target, it would make the appropriate changes to its policy.
For now though, Powell says that the low rate of inflation enables the Fed to slow down its policy change decisions and carefully decide what changes to incorporate to the benchmark interest rate. On Wednesday, that rate stood at a range of 2.25% to 2.50%.
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