What will the Fed do for an encore?
After Federal Reserve Chairman Jerome Powell helped boost the Dow Jones Industrials Average by 600 points on November 28 just by making a speech, the Fed has a tough act to follow on December 19. That's when it makes its next interest rate policy announcement following the upcoming Federal Open Market Committee (FOMC) meeting.
To add to the drama, the Dow dropped by about 800 points less than a week later, on concerns about tariffs and the yield curve. As backdrop for all this, in recent weeks, critics from the White House to Wall Street have weighed in with the opinion that the Fed is raising rates too quickly.
What it all adds up to is that the December meeting could be the most closely watched since the financial crisis. Consumers should pay close attention too, as they have plenty at stake.
Economic context for the Fed's decision
The specific comment from Chairman Powell that sent stocks soaring was interpreted as an indication that the Fed would slow its path toward higher interest rates. Speaking to the Economic Club of New York, Powell referred to interest rates as being "...just below the broad range of estimates of the level that would be neutral for the economy…"
If that doesn't sound like such a big deal to you, what made Wall Street so giddy were the words "just below." This suggestion that the Fed might be close to finished raising rates for the time being contrasts with earlier words and actions by the Fed. After all, the Fed has already raised its interest rate target by a full percentage point in the past year, with another quarter-point increase widely expected at the upcoming December meeting.
Critics of the Fed have been concerned that continuing to increase interest rates so sharply would have a dampening effect on investments and the economy. Powell's recent comments were widely interpreted by market observers that the Fed would take a gentler approach to raising rates in the year ahead.
New Fed policy, or just semantics?
For all the hip-hoorays from market cheerleaders, were Powell's comments really indicative of a change in policy direction? A slowing of rate increases over the year ahead seemed almost inevitable anyway. A year ago, the Fed came out of its December meeting with a rate target of 1.25 to 1.50 percent and a long-term Fed funds rate projection of 2.8 percent. That meant, in the eyes the FOMC, that rates were between 1.3 and 1.55 percent below neutral at that time.
In its September, 2018 meeting, the FOMC hiked its current federal funds rate target to a range of 2.00 to 2.25 percent, and reset its long-term rate projection to 3.0 percent. That implied the Fed rate target was between 0.75 and 1.0 percent below neutral -- already closer to neutral than when this year started.
If, as expected, the Fed hikes its rate by another quarter point in the upcoming meeting, and perhaps softens its long-term rate projection a little, it would put current rates even closer to neutral. Perhaps close enough to explain Powell's characterization of rates as just below neutral, and certainly close enough to indicate less in the way of rate increases next year.
Fed policy might seem like nothing more than dry economic theory at times, but the Fed's decisions -- and especially the conditions on which the Fed bases its decisions -- can hit consumers directly in the wallet. Already, credit card rates have risen by about 3 percent in just two years, and mortgage rates are on track for their biggest calendar-year increase since the mid 1990s.
With consumer debt at record levels, interest rate increases have a serious impact. That's why consumers should be tuned in to whether the Fed meeting produces any indication that more rate increases are on the way.
How the Fed may find balance
On the surface, there would seem little reason for so much concern over the pace of Fed rate increases. Unemployment remains low, U.S. GDP growth is reasonably steady, and inflation is moderate. However, slower growth from economies around the world and recent stock market volatility have raised concerns that the good times may not continue. Throw in the jarring late-November announcement of massive layoffs by General Motors and a sub-par employment report on December 7, and it's easy to see why some are calling for the Fed to rein in its rate increases.
At the same time, the upcoming meeting stands as the sternest test of Powell's short tenure as Fed Chairman. With the Fed already expected to raise rates in the upcoming meeting, can he afford to appear to cave in to public pressure by not raising rates?
A course that would both acknowledge concerns while preserving the Fed's independence would be to go ahead with the current federal funds rate increase while softening the long-term rate projection. That would continue the course the Fed had objectively set, while giving critics the consolation of indicating a gentler slope of rate increases in 2019.
In other words, both the rate decision itself and the update to the Fed's economic projection are the keys to watch coming out of the upcoming meeting.
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Previous Federal Reserve Board Update Articles:
|FOMC Date||2018 FOMC Meeting Update Articles|
|1/31/2018||3 ways to profit when market rates outpace the Fed|
|3/21/2018||Fed rate increases not helping consumers|
|5/2/2018||Interest rates surge despite Fed's inaction|
|6/13/2018||Your strategy when the federal funds rate rises|
|8/1/2018||Banks aren't waiting for Fed rate increases|
|9/26/2018||September 2018: Rate hike may hurt more than help consumers|
|11/11/2018||Look for bank rates to move even as Fed stands pat|