Investors are watching the Federal Reserve meeting this week for yet another interest rate hike. Here’s a look at what investors can expect, what goes into the Fed’s decision and where the economy was the last time interest rates were this high.
The March Fed meeting begins on Tuesday, but the decision won’t be made public until 2:00 p.m. ET on Wednesday afternoon. New Fed Chair Jerome Powell will hold his first ever press conference at 2:30 to discuss their decision and forecasts. Powell took over for former Fed Chair Janet Yellen in February.
The Federal Reserve raised interest rates three times in 2017, the last hike coming in December. A rate hike this week would put the federal funds rate between 1.5 and 1.75 percent.
It’s extremely unlikely the Fed will raise rates higher than the 1.5-1.75 range this month. They haven’t raised the federal funds rate by more than 0.25 percent at a time since May 2000.
The latest round of economic numbers from February—particularly PPI, CPI—only increased conviction for a March rate hike. According to the CME FedWatch tool, the bond market was pricing in an 81.7 percent chance of a rate hike one month ago. As of this writing, the probability of a hike had gone up to 88.8 percent.
To understand why the Federal Reserve changes interest rates and what goes into those decisions, it’s important to understand what the body’s goals are. According to the Federal Reserve’s website, its objective in modifying monetary policy is to maximize U.S. employment (which is near record lows), keep prices stable, and moderate long-term interest rates.
In January 2012, once the dust had settled from the financial crisis of 2008, the Federal Open Market Committee stated that its long-term goal would be to reach 2 percent inflation as measured by the price index for personal consumption expenditures, or PCE. The Fed also said that it considers a longer-term normal rate of unemployment to be about 4.6 percent.
In February, the U.S. inflation rate rose to 2.2 percent as measured by the consumer price index, or CPI. The unemployment rate was unchanged from January at 4.1 percent. So we’re right about where the Fed wanted us to be.
The last time the Fed funds rate was above 1.5 percent was September 2008. At the time, the CPI inflation rate was about 3.6 percent and the unemployment rate was 6.1 percent.
That was obviously a dramatically different economic situation than today. At the time, the Fed was furiously cutting rates to combat a contracting economy. The U.S. lost 159,000 jobs in September 2008, and the S&P 500 plummeted by 42.7 percent in a six-month stretch from September 1, 2008, to March 1, 2009.
The U.S. added 313,000 jobs in February 2018, showing that today’s economy is a completely different story than 2008.
With the likelihood of a rate hike all but certain, Wall Street will be watching for what hints Powell about future rate hikes, either in 2018 or beyond.
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