Daily Spotlight: A Pause, For Now

Summary

The Federal Reserve wrapped up its latest Open Market Committee meeting on Wednesday and, as expected, decided to maintain its current fed funds target rate of 5.00%-5.25%. This pause came after 10 consecutive increases by the central bank over a period of 15 months. All 12 governors were in agreement for the decision, as inflation has moderated over the past year (the latest core CPI reading was 4.0% and the latest core PCE Price Index reading was 4.4% — both still well above the Fed’s target of 2.0%). But the meeting was not without drama. According to the latest fed funds “dot plot” forecasts by the governors, the central bank’s new target for the rate at year-end is 5.63%. That’s two more hikes. Three voters (plotters?) think there should be even more increases after that. We are not so sure. Our forecast calls for the Fed to keep its target rate steady for the balance of the year as inflation continues to moderate. Yes, shelter and transportation costs remain stubbornly high. But oil continues to trend downward on global economic weakness, despite threats of production cuts from OPEC, and we don’t see the need to keep rates high if inflation trends down toward 3.0%. What’s more, the Fed has another mandate besides keeping inflation low: it is also supposed to promote maximum employment. While the latest jobs reports have been consistent with GDP growth, we think that the full impact of the Fed’s decisions over the past year have yet to be felt in the economy. We think the central bank may well be lowering rates if the jobless rate rises above the 4.0-4.5% level over the next few quarters.

Source: finance.yahoo.com