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What Is The Federal Reserve Telling Investors

Recently, Federal Reserve Chairman J. Powell expressed concerns about tariffs and the impact of trade war on the U.S. economy.

The Federal open market committee, led by Jerome Powell, decided to raise the fed funds target range by 25 basis points, to a range of 1.5 percent to 1.75 percent, continuing the slow and steady pace of interest rate hicks initiated by his predecessor, Janet Yellen.

This was exactly what the market expected, but there were a few key comments Powell made in his first speech that investors should keep in mind.

There were some data key points that came from the Fed Open Market Committee policy meeting, held on 26th April, 2018.

Firstly, the Federal’s decision to raise rate by 25 basis points reflects a strengthening economy, reflecting in extremely low unemployment rates and a growing gross domestic product(GDP) that is being stimulated by tax cuts and a budget deal that will raise Fed spending by $300 billion over the next two years.

The Federal Open Market Committee signaled that there would be just three rate hikes in 2018, the same number expected during the last Federal meeting in December. Some observers thought the Federal might hike four times this year, but inflation has not gotten high enough to justify that. The Federal also announced it is increasing its 2019 projection from two rate kikes to three, and is also increasing its 2020 projection from one rate hike to two.

Short-term treasury bonds also rose on the news, as the market showed relief there likely would not be four hikes in 2018. Though longer-term five and 10 year treasuries initially fell, they were also up slightly in late afternoon trading.

Importantly, Jerome Powell made some interesting point during his first press conference as the new Chairman.

Here are the points made by the new Federal Reserve Chairman:

  • Trade policy has become a concern going forward for some international trading partners, Jerome Powell mentioned that some members on the committee recognized President Donald Trumpet’s aggressive protective tariffs could negatively impact the economy. If there is a tit-for-tat trade war, even the new Federal Chairman is willing to say that it probably won’t be great for markets.

  • The chairman further stated that in some areas asset prices are elevated. He specifically mentioned equity prices and commercial real estate prices, but added, we don’t see it in housing, which is key.

  • In addition to that, he said we don’t think that recession probabilities are particularly high right now.

This really shows that not much has changed policy-wise. The Chairman was succinct and straightforward in his answers, which the market appreciated.

As the Federal gradually tightens, it will take rates significantly higher than current levels to derail economic growth or the stock market. A recession isn’t remotely imminent, not with the unemployment rate headed below 4%.

The Federal’s primary concern is to prevent inflation from wrecking the economy, which can occur if the economy grows too fast. On the other hand, if the economy slows down too much, it will stall into a recession. As I mentioned earlier, the way the Federal adjusts the speed of the economy is with interest rates. If the economy growing too fast or inflation appears to be growing, the Federal will raise interest rates.

Higher interest rates tend to slow business growth and consumer spending. If the economy is slowing too much, the Federal can lower interest rates, which makes it cheaper to borrow and that encourages businesses to expand and consumers to spend.

This report shows that, the Federal Reserve is telling investors something and why they should care so that there will not be inflation in the economy.

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