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Why the Federal Reserve Pulled a 180

April 15, 2019

The Federal Reserve increased interest rates in quarter-point increments four times last year. The same plan was expected to take place in 2019 while the Fed also sold $50 billion worth of bonds per month.

 

The conventional thinking was that this strategy would further stabilize the economy and set the conditions for long-term, sustainable growth.

 

Well, all that’s out the window now.

 

The Fed changed course and said there will be no rate hikes in 2019, and perhaps none in 2020. The policy body also said it would trim its bond selling program in May and then end it altogether in September.

 

The Fed went from hawk to dove. What happened? Several things.

 

First, President Trump appointed Richard Clarida to the Fed, and he is now a vice chair on the Federal Open Market Committee. He and chairman Jerome Powell are doveish on monetary policy, shifting the committee’s overall balance.

 

The Fed also saw significant tightening in the credit market late last year, which can be viewed as economically limiting. The rising U.S. dollar didn’t help that situation any. And when you factor in the government shutdown, you’ve got a scary situation.

 

Second, core inflation unexpectedly stopped rising toward the Fed’s 2 percent target. It even started falling. This made the Fed reconsider its entire rate-hike strategy, which relied on low unemployment to increase inflation.

 

Lastly, the decreased growth outlook here and abroad, along with trade wars, seem to have forced the Fed into action somewhat. Act now before it’s too late? Perhaps.

 

So, we’re on a new path. Thankfully, the markets and economy seem to have responded favorably, thus far. Hopefully that continues, though it’s no sure thing.

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