Thursday, 13 December 2018
Lean in ... the next Federal Reserve (Fed) meeting on December 19 can potentially affect your bank account - and you should take notice. If you are wondering if the Fed decision will affect people without a US bank account or living in the US altogether; the simple answer is: if it will affect people in the US, it will most likely affect the global economy.
The effects of the upcoming decision will be far-reaching and deep. One of two outcomes will take place: either the Fed will raise the benchmark rate (anticipated at a quarter percent) or leave it unchanged at its current rate. The only problem is both decisions are fraught with a potentially perilous outcome.
In a nutshell, the US economy has been performing well, while global economic growth is slowing down. The current US economic expansion is the second longest in its history lasting since mid-2009.
As accurate as that statement may be, the winds of change are starting to shift. The latest stretch of volatile stock market performance caused the S&P to lose 1.5 percent on the year after last week's 4.6 percent drop. The largest single week drop since March. The Nasdaq and Dow Jones had a turbulent ride on Tuesday due to a number of policy and political factors.
Inferring from economic data and gleaning from political dynamics is more of a skillful intuition painting a predictive picture of the futureWalid Jawad
Snapshot of factors
The US economy has been reaping the benefits of the $1.5 trillion tax cut Trump pushed through Congress last December. The accompanying boost in government spending has lead to low unemployment and prompted stronger growth has run its course and is no longer a factor.
The trade wars between the US and China, the two largest world economies, is causing serious uncertainty in the market. When China signaled its willingness to lower the car tariffs down to 15 percent the market was abuzz early in the day this past Tuesday.
A week earlier, the Tuesday prior, Trump send the stock market in a tailspin when he tweeted “I am a Tariff Man,” adding to the uncertainty of the outcome of trade negotiations between the two nations.
Numbers don’t lie, hindsight being 20/20 it’s easy to pontificate drawing a straight line between cause and effect. It is much harder to project into the future, especially at a time when experts are warning of an upcoming global depression.
Numbers don’t lie, hindsight being 20/20 it’s easy to pontificate drawing a straight line between cause and effect. It is much harder to project into the future, especially at a time when experts are warning of an upcoming global depression.
Inferring from economic data and gleaning from political dynamics is more of a skillful intuition painting a predictive picture of the future.
The numbers game
The current numbers are reflective of a volatile phase whereby big players are battling the gyrations for profits, while the rest of us are drifting in the seas of an increasingly unstable stock market. If you are a numbers person, you would be reassured by the latest low unemployment rate of 3.7 percent.
Even more reassuring is that inflation remains within the 2 percent target the Fed likes to maintain. This means that the Federal Reserves rate-setting policies have been working optimally. The current interest rate is in the target range of 2 to 2.25 percent, which is effectively balancing the US economy - an achievement that is hard to maintain.
So now, we must ask if the Fed will hike the rate by 0.25 percent in their next meeting on the 19th as predicted? Before we examine the possibilities, we need first to understand why they would change the rate up or down in the first place?
Here is the dense lesson (for those who dare/interested): short-term rates are a major tool in the Federal Reserve toolbox used to balance the US economy. The short-term rates affects the flow of cash into the economy functioning as a corrective balancer between recession and inflation.
In other words, the rate is set for the elusive goal of striking a balance between the two polar opposites: maximizing employment and keeping inflation in check. The Fed is the only body that has the authority and independence to do so.
Trump has put the Federal Reserve in his crosshairs. The US president has no authority over the Fed’s decision making regarding its benchmark interest rate. Yet, he made his views on the matter exceptionally clear tweeting his discontent of the Fed expected rate hike. Voicing his criticism is guaranteed by the First Amendment, but it doesn't make tweeting his unhappiness a good idea.
The grim outlook
The old Wall Street adage that bull markets don’t die of old age but rather get killed by the Federal Reserve sounds more like a prophecy at this point. The Federal Reserve had planned one more rate hike this year and three in the coming 2019. Increasing the rate too fast will slow down the economy risking a reversal in the trend of economic recovery.
The Fed intents on keeping the current trend of low unemployment and inflation levels going. So if the Fed doesn’t hike the rate, it might signal a less than confident economic outlook. Meaning that keeping the rate unchanged will be interpreted in part as a reversal of past projection of a strong future economic performance.
Not only that, but it will also come across as if the Fed is kowtowing to the president. Such a perception will rob the Fed from its credibility and perceived independence.
On the other hand, if the Fed raises the rate, it might be ignoring the gathering storm on the economic horizon ensuring an unfavorable outcome for the already volatile market. The skittish market is already showing signs of a possible slow down. For the Fed to ignore the glaring sign is to apply the breaks when the market is already showing signs of sputtering.
Both outcomes are less than encouraging, but this analysis is not for its own sake, it is a predictive outlook that can inform short-term financial decisions on a personal level.
Your options
Risk-averse experts suggest putting any amount of money which is not needed within the next two years in CDs or savings accounts. As for long-term investments, according to experts, individuals should not panic and leave that money in the market as long as that budget is not needed in the next five to 10 years.
I must say, it is a sad state of affairs when working men and women have to pay for Trump’s freedom of speech from their own wealth. If the president cares for the wellbeing of the nation, he will stop taking to Twitter to launch his tirades against the Fed.
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