Has the Fed Changed Course for 2019 - And Should You Be Worried?
December 4, 2018
By Michelle Holmes, CFA
Trust Investment Officer
Last week Federal Reserve Chairman, Jerome Powell said we were “just below the broad range of estimates” of the neutral fed funds rate. In October, Chairman Powell stated that we were “a long way from the broad range of estimates” of the neutral fed funds rate. Did the Fed change course on raising interest rates?
Has the FED's Outlook Changed?
The short answer, no. The change in tone is not a change in policy but rather an acknowledgement that we are closer to the end of the rising rate cycle than we are to the beginning. The Federal Reserve Open Market Committee (FOMC) opened the door to a pause in raising interest rates next year. The FOMC may raise rates less than it forecasted for next year more in-line with market expectations.
The minutes from the last FOMC meeting confirm the Federal Reserve (Fed) is likely to raise the federal funds rate 0.25% at the December 2018 meeting. This brings the overnight lending rate within its range of the neutral fed funds rate estimates of 2.5% to 3.5%. That coupled with the uncertainty of fiscal and trade policies lead the FOMC to announce a more flexible approach going forward to adjust for changing circumstances.
The Federal Reserve has a dual mandate of full employment and stable price. Today the unemployment rate is low at 3.7% and the Fed’s preferred inflation measure is now below its long-run target as shown in the above chart from the Wall Street Journal’s, Daily Shot.
Will Higher Interest Rates Affect You?
It depends if you are a borrower or a saver. For those borrowing money, rising rates mean you will pay more interest on new or variable rate loans. However, rising rates are good news for savers. Higher rates mean savers earn more interest on bond investments like CDs, money markets, and bond funds.
For more than 135 years, SNB Wealth Management has helped individuals and families become savers, and turn their plans into realities. Contact one of our professionals today for an appointment to review your long-term financial goals.