Key Takeaways From Recent Actions by the Fed – Introduction
In December, the Federal Open Market Commission (FOMC) of the United States to deliberate on the monetary policy of the country. After the meeting, the commission released a report where they hiked interest rates by another 25 basis points. This was the fourth rate hike that year. It was a continuation of the rate increase program that started in 2015. Since then, the bank has increased rates from zero to the current 2.75%.
The Fed has been tightening because the economy has been doing well. The unemployment rate is at historic lows, the industrial production is increasing, and the general economy is doing very well. At the same time, inflation has been contained very well. The stock market too has been moving from strength to strength. In fact, after the 2008/9 crisis, the stock market has climbed by more than 300%. Therefore, to prevent the economy from overheating, the Federal reserve has been tightening. This is because the recovery was fueled by an easy money policy that was also caused by low interest rates. The quantitative easing too helped fuel the growth. In fact, corporate profits have increased by more than $4 trillion. The funds that have been borrowed by the companies have been used to pay dividends and in share buybacks.
The argument among many scholars is that the Fed’s policies have exposed the market to unwanted risks. This is because the easy money policies have led to irrational exuberance as investors, companies, and individuals rush to borrow money. As interest rates rise, so will the cost of borrowing. This means that the next financial crisis will come from the corporate failures. For example, companies like AT&T, Waste Management, AB Inbev, and Kroger have hundreds of billions in debt.
Last week, the Federal Reserve chair was interviewed at the American Economic Institute (AEI). Alongside him were the previous Fed chairs, Ben Bernanke and Janet Yellen. The interview was received well by the investors because he said that the Fed will be more flexible in the coming meetings. This was an important message of reassurance because investors were worried with the medium-term direction of the Fed. In fact, after becoming Fed chair, Powell has come out to be a relatively hawkish Fed chair.
This has led to a conflict between the chair and the US president. The president believes that the Fed is working against his agenda by accelerating the pace of rate hikes. These thoughts are not new. In fact, in his campaign, he said that the financial market would crash when the Fed starts to raise rates. Recently, the US and global markets have fallen into bear territory as investors worry about the pace of hikes.
The consensus is that the Fed has been a poor communicator. It has done this by issuing forward guidance. This is a situation where the Fed tells investors what it will do in future. If it fails to follow through, it could be a sign that the economy is not doing well.
Later this week, the Fed will release the minutes of the December meeting. In addition, investors will pay close attention to the CPI numbers from the US.
Key Takeaways From Recent Actions by the Fed – UsefulTips
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