As the U.S. economy continues to show signs of strength, many have wondered if it is time for the Fed to cut interest rates. This viewpoint has also been expressed by President Donald Trump in various Twitter messages. In many cases, the economy will move higher when restrictive interest rate policies are reduced, but some experts believe that it is not the right time to take action.
Much of the debate centers around the fact that the U.S. economy is already showing signs of strength. Inflation remains at comfortable levels and the unemployment rate has fallen to its lowest levels since 1969. In fact, Pennsylvania, Wisconsin, and Vermont actually set new all-time unemployment records during the month of April. For some economic experts, this means there is no need to stimulate the economy by reducing interest rates.
At its most recent policy meeting, the Federal Reserve kept its base interest rate levels unchanged at 2.25 to 2.5%. In addition to this, the policy statement that accompanied the no-change decision suggested rate hikes would be unlikely in the months ahead. This means that consumers are not likely to see a rate cut during this time frame. But, it also shows that the Fed is not necessarily interested in making its policies more restrictive.
With inflation rates low and the U.S. economy maintaining a brisk rate of growth, it is not entirely surprising to see stock markets trading near record levels. This has been true for each of the standard benchmarks (which include the S&P 500, the NASDAQ, and the Dow Jones Industrial Average). When stock markets are this high, consumer confidence also tends to show strong positives and this brightens the outlook for corporate spending. As a result, most of the current financial evidence suggests that the bull market may continue well into the second half of 2019.
Outlook: Important Questions Raised
This begs some important questions: Does the Fed really need to cut interest rates? Or can all of this strong economic activity continue on its own? Only time will tell. But the trends look encouraging at this stage, and it will be interesting to see if important factors like national retail sales are able to remain robust throughout the summer period.
It seems that the Federal Reserve has some important issues to cover at its next round of monetary policy meetings. Investors will be looking for clues to decide whether it is likely an interest rate cut is actually on the horizon. Economic analysts have come out with equal force on both sides of the debate but the Fed is the governmental body that will ultimately decide on the true need for a change in interest rate policy.
The Fed’s most recent meeting gave the market a clue about where we will be headed before the end of 2019. But the policy statement at coming meetings will be critical for analysts looking to make forecasts about the underlying strength in the U.S. financial system.
