The Federal Reserve, commonly known as the Fed, had one of its periodic meetings last week and kept interest rates the same. This meeting was one of the eight regularly scheduled meetings that the Fed has each year.
While expectations were that the Fed would not increase interest rates at the meeting, the Fed did change its guidance regarding future rate increases for the balance of the year. Previously the Fed had indicated the possibility of having four rate increases this year, which they have now changed to two.
In recent months there had been increasing uncertainty whether the Fed would actually go ahead with its planned rate increases this year. This statement by the Fed just confirms that it will move more slowly with regards to future rate increases.
It should also be noted that just because the Fed is discussing have two rate increases this year does not necessarily mean that it will happen. Economic conditions can certainly change, and if they do the Fed will reassess its plans.
With the Fed on hold with regards to rate increases this has caused the U.S. dollar to weaken. Over the past year the dollar has been in strong in anticipation of the rate increases. When our rates are rising this tends to attract foreign capital, thus strengthening the U.S. dollar.
When the U.S. dollar is strong commodity prices tend to fall. The most obvious commodity is oil, which had been quite weak until just recently. There are other factors besides currency moves that impact commodity prices, but generally a stronger dollar means lower commodity prices.
The move in the price of oil has been quite dramatic recently. Earlier in the year oil had fallen below $30 per barrel. As of March 18th, the price of oil was back above $40 per barrel.
This will mean that the price of gasoline will start to increase. Normally this time of the year gasoline rises in price because refineries need to produce the higher cost summer blend of gasoline. The recent jump in crude prices will mean a greater than normal increase in prices at the pump.
With the dollar being a little weaker that will result in an increase in the inflation rate, as it increases the cost of imported goods. Inflation has been running below the Fed’s target rate of 2%, so a delay in the increase in interest rates should allow for the Fed to achieve its targeted inflation rate sooner.
For people who are borrowing to make major purchases this Fed action is good news. This means that rates on auto loans and other loans tied to the prime rate will remain low. Fed policy does not impact mortgage rates directly, but generally mortgage rates are low when short term rates are near current levels.
For savers this is just a continuation of having to contend with earning virtually nothing on savings or money market accounts. Eventually rates will move higher, but for now savers will have to contend with the very low rates.
The stock market has performed better recently on the expectation that fears of a recession were overblown. Stock market investors were pleased that the Fed will be cautious in terms of implementing future rate increases.
Looking forward expect the economy to exhibit slow to moderate growth. Inflation will likely be a little higher, but not dramatically so. Interest rates are still likely to move higher, but will take longer than originally anticipated.
