What You Need to Know About the Federal Reserve’s Predictions.

Sep 17

The Federal Reserve Open Market Committee (FOMC) held its September meeting earlier this week, a notable one since this will be the last before the November elections. The Federal Reserve decided to hold its benchmark interest rate at 0-0.25% and continue its program of asset purchases ($80 billion in Treasuries and $40 billion in mortgage-backed securities), giving a little more clarity with respect to forward guidance on its long-term inflation goal. Their announcement and modeling suggest these rates could last well into 2023.

The Federal Reserve historically has had a dual goal of maximum sustainable employment and price stability. Price stability is achieved by targeting an inflation rate at or below 2%; should core inflation rise above that target for reasons such as an overheating economy, the Federal Reserve has the ability to raise rates and bring inflation in check. With the onset of Covid-19 however causing rates to be cut dramatically by Fed Chairman Jerome Powell, the Federal Reserve has also changed its inflation target to an “average rate of 2%” rather than an explicit 2% inflation goal. This further suggests that the Federal Reserve is prepared to maintain an accommodative monetary policy for the foreseeable future i.e. keep rates “lower for much longer” and allow the US economy to recover to solid ground, before it even begins to think about raising interest rates; one consequence might be that this regime of lower rates in the US and thus a potentially falling dollar could provide a boost to emerging markets and give policy markets there a little more flexibility.

The implications of these predictions are:

Low interest rates could continue to stimulate economic growth & recovery.
These rate cuts could hurt lenders as borrowing money becomes cheaper since large purchases on credit becomes more affordable, such the cases of home mortgages, auto loans, and credit card expenses.
These rate cuts could hurt savers as lower rates may boost stocks but drag bond prices and consumers earn less on their cash savings accounts held with banks.
Low rates have the potential to spur inflation, which eats away how far your money can get you.