"Patience" is Key: Could The Fed Be Done Raising Interest Rates?
February 4, 2019
By Krista Biernbaum, CFP®
Securities Analyst II
A lot can change in the matter of a couple months. The Federal Reserve’s view on interest rates is a perfect example of this.
- Back in October, Federal Reserve Chairman Jerome Powell said, “we’re a long way from a neutral funds rate.” This signaled the Fed had several rate increases left in the current rate hiking cycle.
- At the end of November, the Fed Chairman said “we’re ‘just below’ a neutral fed funds rate.” Hmm, maybe we won’t see many more rate increases after all.
- At its December policy meeting, the Fed noted “some further gradual increases” in interest rates are warranted. Okay, we are likely to see at least a couple more rate increases.
- This year the Fed is taking a different approach. It added some new language to its statement saying it “will be patient.” Could the Fed potentially be done raising interest rates?
A Recap of the Fed’s First Policy Meeting
Last week, the Federal Reserve met for its first Federal Open Market Committee (FOMC) meeting of the year. As expected, there was no rate increase at this policy meeting. Following the conclusion of its two-day session, the Fed released a statement outlining its views and action steps. The biggest change in this statement from the prior one is its reference to future rate increases. As noted above, “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
What it Means for the Markets
What do the markets think of the Fed’s dovish tone? They applaud it. The stock market rallied on Wednesday following the conclusion of the Fed’s policy meeting. Also, bond yields fell; and markets currently price in little to no chance of a rate increase this year. As of Thursday, the fed funds futures were showing just a 10 percent probability of a rate increase in 2019.
Will The Fed Increase Rates in 2019?
This leads to the big question on every investors’ mind: Will we see any rate increases in 2019? It depends on the economic data. The Fed is no longer on autopilot; it is taking a data dependent approach this year. Where the U.S. economy and inflation go will determine if we will see a rate increase or two in second half of the year.
As of now, things still look good for the U.S. economy; Friday’s jobs report illustrated this. The U.S. economy added 304,000 jobs in January. Not too shabby. Also, January was a great month for the U.S. stock market. In fact, according to Bloomberg News, U.S. stocks had their strongest first month since 1989.
Just like with the Fed, a patient approach to investing is key. Some of the worst days and months in the markets are followed by some of the best. The worst December since 1931 was followed by the best January in 30 years. Therefore, it is important to stay fully invested, even in the volatile times.
If you have any questions or would like to schedule a review of your accounts, feel free to give your wealth advisor a call today.