What’s Going On Here?

• The Federal Reserve said it would freeze the key US interest rate in place;
• Although it admitted that rates might ultimately trickle downward this year.

What Does This Mean?

• There’s been much anxiety among investors about which way the US central bank would go.
  • On the one hand, recent data has shown improving consumer spending, super-low unemployment, and American factory output picking back up – suggesting an economy on a solid footing.
  • On the other hand, slowing wage increases coupled with growing global trade conflict may require lower rates to sustain US economic growth.
• Looking at individual committee members’ expectations for future interest rate movements, it’s now more likely to cut rates this year than it was in March – primarily thanks to increased economic uncertainty.

Why Should I Care?

For markets: Much delay about nothing.

• US stocks have fallen straight after every Fed update since March 2018, so their initial rise, albeit slight, was perhaps a surprise.
• Investors had been buying up government bonds of anticipating central bank interest rate cuts (Fed’s acknowledgment that such declines are on the way appears to have justified them). Some may find it unusual that the Fed hinted at a need for future rate cuts without actually doing anything about it, but central banks don’t have the best reputation for acting appropriately…

The bigger picture: So much for the battle; now comes the war.

• Lower interest rates typically bring down the value of a country’s currency – making exports appear cheaper to foreign buyers.
• That may be one factor behind the US president’s calls for the Fed to cut rates: if the US can’t tariff its way into an improved “trade balance”, it could instead benefit from a weaker dollar cheapening American products compared to Chinese and European rivals’ – and beat them at their own game.

Content source: Finimize. (2019) Freeze Frame. Available from: https://www.finimize.com/wp/news/freeze-frame/ [Accessed 22 June 2019]