Finally, the Fed could use its statement to offer up a new plan for how it will deal with its massive bond holdings. Policymakers have been shrinking their balance sheet, which grew as the Fed bought government-backed securities to bolster the economy in and after the recession. That unwinding, which is probably slowing the economy slightly by driving some interest rates higher, is scheduled to end in September. It’s possible that officials would stop the process early, so their policy is uniformly pointed toward bolstering growth.
Those pesky prices
If you’re looking for a quiet signal about whether another cut is possible, pay attention to whether policymakers fixate on America’s inflation shortfall in their statement or if Mr. Powell does during his news conference. Officials have increasingly worried about stubbornly weak price gains, and while Mr. Powell has said he expects inflation to gradually rise, progress has been slow.
The Fed formally adopted a 2 percent goal in 2012, and has since failed to sustainably achieve it. The central bank’s preferred inflation gauge rose just 1.6 percent in the year through June. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said on July 16 that he would be comfortable with a “couple” of cuts this year “on the basis of inflation alone.”
“Even now, the best forward-looking measures of inflation are closer to one and a half” percent, Janet L. Yellen, the former Fed chair, said in Aspen, Colo., on Sunday. “And it looks like inflation expectations are slipping. And that’s dangerous, because inflation expectations play a role in the prices that firms actually set.”
Dangerous may seem like an extreme word — who doesn’t like low prices? — but inflation is grease on the wheels of a healthy economy. It gives companies a little headroom to raise wages, and it lifts interest rates, leaving the Fed with more room to cut them in a downturn.
What does it mean for my wallet?
Expectations of a rate cut have already invigorated markets, pushing the SP 500 stock index to new highs. What happens to stocks on Wednesday will largely hinge on future guidance: If the Fed signals that more easing might come, asset prices might soar. If it hints that it will be cautious when spiking the proverbial punch bowl, the response may be less ecstatic.
Likewise, mortgage rates have already fallen on anticipation of a rate cut. The Fed’s signaling could determine how they evolve. Credit card rates could decline over time, as well, but they are influenced by other factors — including credit scores — and do not track as directly with the Fed’s rate.
Article source: https://www.nytimes.com/2019/07/31/business/economy/fed-meeting-interest-rates.html?emc=rss&partner=rss
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