When the Federal Reserve met in December, they raised rates for the first time in a year and just the second time in a decade. That rate hike signaled the Fed’s growing confidence in a strengthening economy. At that time, Fed Chair Janet Yellen said 2017 will bring multiple rate hikes as the economy continues to improve. But after meeting Wednesday, the Federal Reserve chose not to raise rates again. Should we be worried?
Is the Federal Reserve’s Confidence Fading?
The Federal Reserve controls the Federal Funds Rate, which is a short-term interest rate applied to financial institutions who loan funds to other financial institutions. This rate affects monetary and financial institutions, which in turn affects employment, growth, and inflation. Basically, the higher the federal fund rate, the more expensive it is to borrow money. The more a bank pays for its money, the more the bank’s customers have to pay for mortgages, car notes, credit cards, and loans.
The reason the interest rate is so important is because it’s a tool used to provide relief during tough economic times. The Federal Funds Rate rises to reflect low unemployment and a strong economy. When the economy begins to struggle, the biggest tool the Federal Reserve has in its arsenal is to lower interest rates to relieve financial stress from financial institutions and lenders, and thus consumers.
So when the Fed said in December that they plan on multiple rate hikes in 2017, that was seen as a vote of confidence.
But after today’s meeting, rates are staying put.
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Since World War II, the country has experienced recessions about once every six years. Our last recession started in 2008, 9 years ago. Does this mean the Fed is worried about the economy under Trump? The markets have all seen record highs recently, indicating a strong economy. And the dollar has been surging.
So what’s going on?
Things may not be quite as strong as they seem. The markets are seen as a vote of confidence by investors in the immediate, short-term strength of the economy, and the Fed’s role is to plan for the long term. And while the dollar has been surging, its strength could actually hinder the economy as it would negatively affect exports.
The Fed’s policy vote was unanimous to hold rates steady, but the Fed noted that “measures of consumer and business sentiment have improved of late” but said business investment remains “soft.”
Right now, it’s just a wait and see approach. The Fed meets again in March, but Yellen will have an opportunity to pave the way for a rate hike at that point when she testifies to Congress on February 15th.
Watch the news from CNBC regarding the unchanging interest rates:
Barring any major economic crisis, expect rates to rise at least three times over the course of 2017.
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