Fed’s stance on hiking rates this year
The Fed released the minutes from the May 1–2 FOMC meeting on May 20. After taking an aggressive approach to rate hikes since 2015, the Fed has decided to take a calmer approach in 2019.
The FOMC minutes discussed that Fed officials showed no signs of urgency to change interest rates in 2019 even if the economy continues to strengthen. The minutes also said that the Fed decided to take a patient approach about hiking rates this year even if global economic and financial conditions improve. Earlier this year, during the FOMC’s first meeting on May 1, Fed officials kept the rates unchanged. The minutes also stated how the Fed decided to control short-term rates in an attempt to maximize employment and keep the inflation rate near its target.
Fed’s aggressive rate hikes since 2015
Since December 2015, when the Fed first increased interest rates, there have been nine rate hikes until December 2018. We have seen the labor market strengthening this year with the impressive April Jobs report. Read What April’s Job Numbers Tell Us about the US Economy to learn more. The unemployment rate fell to 3.6% in April. The US added 263,000 jobs in April. Usually, a strengthening labor market and rising inflation put pressure on the Fed to hike interest rates. The fear of rising interest rates made investors panic. The market was volatile at the beginning of 2018, which called for the market sell-off at the beginning of 2018. So far in 2019, inflation remains below the committee’s 2% target, which explains the patient approach to rate hikes.
CNBC stated that the participants in the FOMC meeting mentioned that they think some of the headwinds like Brexit, the global economic outlook, and trade negotiations have faded. However, the FOMC meeting ended three days before the US-China trade talks got ugly. Read US-China Trade Tensions: Why the Consumer Sector Took a Hit to learn more.
The S&P 500 Index (SPY) fell 0.28%, while the tech-heavy NASDAQ Composite Index (QQQ) closed with a loss of 0.45% on May 22, respectively. The Dow Jones Industrial Average closed with a loss of 0.39% on May 22.
Will the strong labor market force the Fed to change its approach? Will the Fed continue to stand its ground on the decided approach? We’ll provide more analysis after the FOMC meeting on June 18–19.