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Expect Caution from the Next Fed Meeting

| MoneyRates.com Senior Financial Analyst, CFA
min read

federal_reserve_bankA sudden drop in job growth and an uptick in the inflation rate create an intriguing backdrop for next week's Federal Reserve meeting. On balance, the most likely outcome seems to be caution rather than a new hike in the federal funds rate.

Besides being in line with recent employment and inflation developments, maintaining the level of current fed fund interest rates would help establish that the Federal Open Market Committee (FOMC) plans a gentler course for rates this year after raising them by a full percentage point in 2018.

Stunted job growth explains Federal Reserve caution

In something of a surprise, the Bureau of Labor Statistics (BLS) announced on March 8 that job growth in February was just 20,000 nationally. This was the lowest monthly job gain since September of 2017, and one of only three times in the past eight years that monthly job growth has dipped below 50,000.

Some commentators were quick to blame the slow job growth on snowy weather, but it is important to remember that these employment numbers from the BLS are seasonally adjusted and so would automatically account for the fact that the weather in February is generally pretty bad in much of the country.

In any case, the accuracy of the weather theory will be revealed when the BLS next announces monthly job growth on April 5. In the meantime, the apparent slowdown of job growth creates one more reason for the Fed to avoid creating any further drag on the economy by raising rates too quickly.

Inflation uptick unlikely to affect federal fund interest rates

The Fed describes its mission as trying to strike a balance between encouraging job growth and moderating inflation; so along with the employment situation, it is always important to consider what is going on with inflation leading into a Fed meeting.

On March 12, the BLS announced that the Consumer Price Index (CPI) rose by 0.2 percent in February which, if continued, would project to a 2.4 percent annual rate of inflation. This represents a bit of an uptick after three consecutive months in which the CPI was essentially flat. However, month-to-month CPI numbers can be erratic and inflation for the past 12 months remains at just 1.5 percent.

That inflation rate is below the Fed's 2.0 percent target and, along with the sudden drop in job growth, would tend to argue for no fed-rate hike at the March 19-20 meeting.

Stalling fed-interest-rate hikes would fit recent projections

If the Fed does hold off on raising interest rates next week, it will be the first time in over a year it has gone two consecutive meetings without raising rates. While this would break the recent pattern of fed-rate hikes, it would come as no surprise.

Besides various comments in which Fed Chair Jerome Powell has signaled a slower pace of rate increases in the year ahead, raising rates less frequently would also fit with the Fed's latest projection of where it expects the federal funds rate target to be at the end of the year. The median projection of FOMC members is for the fed interest rate to be 2.9 percent by the end of 2019.

With the current federal funds rate being maintained in a range of 2.25 to 2.5 percent, a projected course to 2.9 percent would imply just a couple quarter-point rate increases over the course of 2019. While raising interest rates at next week's meeting would not be totally out of line with the Fed's interest-rate projection, there seems no reason to hurry - especially in light of recent economic data.

Impact on rates available to consumers

Consumers should remember that the Fed does not directly control the rates on products like savings accounts, money market accounts and CDs. The recent trend in those rates has been not only upward, but has shown a relatively small number of banks breaking away from the pack by offering clearly higher rates. That makes this an especially rewarding time to hunt for the best savings, money market and CD rates.

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