The Federal Reserve Bank (Fed) decided at the end of its two-day meeting Wednesday to continue to wait for the right moment to lower interest rates. As a result, there will be no change in the current 5.3 percent rate. However, it also announced it would cut the selling of assets in an effort to increase the money supply and lower long-term interest rates.
What Rate Cuts Would Mean to You
Fund managers, investors, and bankers anxiously await Fed announcements on interest rates. However, the central bank’s decisions have a direct impact on your financial life as well. Over time, reducing interest rates would lower your borrowing costs. As a result, everything from home loans, automobile financing, and credit cards would be cheaper. In addition, local businesses could reduce prices as their costs decrease.
When Will the Moment be Right?
Fed Chair Jerome Powell told a news conference following the Fed’s decision that a combination of factors, including inflation, wages, employment, and supply chain will determine when the next rate cut will come.
The next Fed meeting is scheduled for June 11 and 12. However, traders and economists are not expecting a change in rates then either.
The year began with expectations for up to six rate cuts. However, a stubbornly strong economy has kicked that can down the road. Now, economic soothsayers are forecasting one to two cuts this year. Most expect the first in September.
Stubborn Inflation
Although the Fed is considering several other factors in making its next rate cut – the primary roadblock to lower rates is inflation.
“In recent months,” Powell said, “inflation has shown a lack of further progress toward our two percent objective.”
The central bank uses the Personal Consumption Expenditures Price Index (CPE) as a measure of inflation. The CPE rate the Fed has targeted is 2 percent.
That index shows inflation at a 4.4 percent annual rate through the first quarter of the year.
The CPE for March was 2.7 percent. That is the first increase of the year. Both January and February CPE stood at 2.5 percent.
“It is likely that gaining greater confidence will take longer than previously expected,” said Powell.
Change in Securities Unwinding and Your Mortgage
In a related issue, the Fed announced it is reducing the number of Treasury Securities and Mortgage-backed bonds it is allowing to mature each month without reinvesting.
The effect should pump more into the money supply. In turn, that could mean lower long-term interest rates on mortgages and more investment in stocks.
Currently the Fed lets up to $60 billion in government securities mature without reinvesting. However, in June, that figure will drop to $25 billion.
The Fed bought trillions of dollars in government-backed securities (Treasuries and mortgages)
From 2020 through 2022. The idea was to bolster the pandemic recession.
As the economy rebounded in mid-2022, the Fed began unloading some of those government-backed securities. That program became known as quantitative tightening.
The more bonds the Fed allows to mature, the greater the risk of high long-term interest rates, including mortgages. That is because interest rates on the securities might have to rise to attract investors.
Strong Economy
One reason inflation has stayed consistently high is a strong economy.
Unemployment has remained below four percent for over two years. The last time that happened was almost 60 years ago.
The Bureau of Labor Statistics will be out with a new jobs report Friday. However, payroll processing firm ADP released its April employment report Wednesday showing employers added 192,000 new jobs in April.
Simultaneously, wages were up five percent from last year. That is the smallest increase since August 2021.
At the same time, the Labor Department issued a report showing job openings falling to a three-year low in March.
The Job Opening and Labor Turnover Summary (JOLTS) reported that job openings were down to 8.5 million on the last day of March. February’s figure was revised upward by 57,000 to 8.8 million.
Markets Close Mixed
Markets closed mixed after Powell’s news conference.
The Dow Jones Industrial Average (DJI) ended the day up .2 percent. At the same time, the S&P 500 (GSPC) and Nasdaq Composite (IXIC) declined over .3 percent.
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