McBride: Inflation Has Fed's Attention
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This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Charlie Turner in New York. Fed policymakers wrapping up a two-day meeting left short-term interest rates unchanged Wednesday. That was no surprise. Any rate hike may not come now until the end of the year. The Fed also signaled it could launch its plan to slowly shrink its $4.5 trillion bond portfolio after the next meeting in September. Joining us to talk about the Fed meeting and statement is Greg McBride, Bankrate.com's chief financial analyst. Greg, weren't investors looking for signals about whether a slowdown inflation might alter the Fed's plans for another rate hike this year?
Well, inflation definitely has the Fed's attention. In June, they had noted their concerns that inflation had been softening. The data has only gotten softer in the past month.
What did the Fed decide at its latest policy meeting and why did it hold rates steady?
And in the latest statement, they noted that on a trailing 12-month basis, no matter how you look at it, at the headline level or even if you exclude things like food and energy, it's well below. It's declined, and it's well below the 2% mark. So the bottom line is this. I think the Fed's going to have a tough time raising short-term interest rates again until inflation starts moving toward that 2% threshold rather than away from it.
I don't know. It sounds like from what you're saying, they could put off a rate hike until sometime next year, even though, you know, household spending and business investment continue to expand, as they say. It just sounds like inflation is not strong enough to justify another rate hike.
Well, it certainly doesn't give them any urgency to hike rates again. So I think in the more immediate term, they're kind of shifting their focus further. away from the movement on short-term interest rates to focus on kicking off the balance sheet, downsizing that bond portfolio. But as far as short-term rate hikes are concerned, it'll be much later this year if we get one before the end of the year. And even that is going to be contingent upon some improvement in those inflation numbers from the Fed's perspective. For consumers, those variable rate credit cards that have been steadily marching higher, the home equity line of credit that's been steadily marching higher, you're going to get a bit of a reprieve from that.
But unfortunately, I think it may also rob some of the momentum from savers. that we've seen beginning to build after three rate hikes in the last seven months.
The economy hasn't been exactly performing great guns this year. Has the economy performed basically in line with the Fed's expectations for 2017?
Well, the Fed has this habit of overestimating, and they overestimate economic output, they overestimate how much they're going to raise interest rates. And, you know, that's kind of an annual tradition, sort of like taxes and Christmas, but this is the first year where they may be close, right? They said coming into the year they were gonna raise rates three times this year, they've done so twice just in the first half of the year, and that gives them the window to do so again before the end of the year. The economy's been softer than expected, again, but the departure isn't as wide this year, as what we've seen from the Fed in the past. But their overestimating of the economic output, you know, that's really become a normal thing for them.
A time-honored tradition. I'm speaking with Greg McBride. He is chief financial analyst at Bankrate.com, and you're listening to Your Money Matters. Thanks for listening, everyone. Greg, how does the Fed's plan to shrink its $4.5 trillion bond portfolio play into this? I know during the financial crisis, they purchased all this money, which was in treasury and mortgage securities. How does that plan to shrink this portfolio work in with interest rate hikes?
Well, let's look at what effect those purchases had in the years that followed the financial crisis.
How is recent inflation data influencing the Fed’s decision to delay further rate hikes?
When the Fed was buying all of those Treasury securities and buying all those mortgage-backed bonds, the goal and the outcome was that it pushed long-term interest rates lower, specifically mortgage rates.
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