Yesterday morning, the Federal Reserve announced there would be no interest rate hike in 2019. This move comes as a bit of a surprise. This decision came during their policy meeting on Wednesday, the second of the year. They decided unanimously to keep the interest rate between 2.25 and 2.5 percent.
After a busy 2018 that saw more than one hike, two more were slated for this year. In fact, as late as December, Fed Chair Jerome Powell suggested as such. Economic growth and record low unemployment would certainly warrant an interest rate hike. Yet, it’s the U.S. trade war with China and even more unknown impacts of Brexit that changed their mind.
“The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Fed said in a statement released following the two-day meeting. “We still see a sustained expansion of economic activity, strong labor conditions, and inflation near 2 percent. But the crosscurrents suggest a less favorable outlook.”
Could Higher Interest Rate Cause a Sluggish Economy?
There’s absolutely no reason to doubt that the current economic forecast will sour. The White House remains optimistic, but December did see some volatility in the market. It’s causing a bit of a worry to economic experts. While much of it might’ve been caused by the government shutdown, they’re expecting a weaker labor market.
“The Fed may be overreacting to market volatility that occurred in December and distortions to economic activity and data from the government shutdown,” said Tendayi Kapfidze, the chief economist at LendingTree. “While many measures of economic growth have slowed, sentiment data which is timelier has rebounded from those declines.”
Could Rates Change?
While it is good news that the interest rates will remain the same for now, this is just a signal. They’re anticipating a slower market. That means they could reverse their decision later in the year. That’s especially true if the U.S. has an excellent summer economically. In short, their decision yesterday wasn’t final.
“Hikes would occur later in the year,” said Kapfidze. “Perhaps starting in September if the economy accelerates over the summer.”
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That would ultimately depend on whether the trade war with China wraps up favorably for President Trump. Good news like that would be a major boost for economic growth in the near future. Even if no new deal was made, just the fact that the war was over might pique the interest of investors.
