Will they or won’t they? When will they? How much will they? 25bps? 10bps? Maybe 15bps? How about the language after the meeting? For those of you who don’t know what I am referring to, the Federal Reserve Bank (FRB) has been debating the merits of the first interest rate increase in the federal funds rate in nearly a decade.
The financial analysts reviewed every potential outcome of the FRB Jackson Hole meeting last month. The markets (stock and bond) held their collective breaths. In the end the committee decided to do nothing.
What does this mean?
First the reason for holding rates steady. Although the US economy has met the target rate of unemployment (5.1% if you’re keeping score) and is close to the target core inflation rate, the global financial markets weighed on Yellen and company and they decided to hold rates steady until they are SURE the economy could withstand an interest rate hike. Of note, the Fed relied mostly on global weakness and financial market instability to support their dovish stance.
This would seem to support the theory that the US economy is strong. Given this lower than expected interest rate environment the financial markets should have welcomed this news. Au contraire. After an initial rise of 100 points, the Dow has dropped after the announcement by 600 points!
So what gives?
Perhaps the market is concerned that the Fed may be concerned about the world economy which is very, well concerning. China is slow, Puerto Rico is in trouble, Greek problems haven’t gone away, and we still have $18 trillion in debt.
So what is good about our economy today?
Unemployment, as I said above is 5.1%, corporate profits are at record levels, Corporate balance sheets are healthy (and financed with very cheap debt), and commodity prices (oil, wheat etc.) are low. Lower commodity prices should help consumers and stimulate the economy in the long run. The global slowdown has led to tough times for investors, but consumers should reap some benefits.