A divided Fed holds the line on interest rate cuts. How does this affect you in your portfolio?
June 19: The Federal Open Market Committee met this afternoon, and they lowered their inflation forecast to just 1.8%. That’s about as close to the sweet spot as an economy can get. All eyes were on the Fed, however, to see how they responded to the European Central Bank’s decision to lower their interest rates. And in what is a thumbs-up for Fed independence, by a nine-to-one decision the Fed decided to hold the line on interest rates, while noting that it’s very possible in the next 12 months that they would be dropped by maybe a quarter of a percent.
So there are two threads going on here that are important to you as an investor. First and foremost is the issue of Fed independence. As the president makes thinly veiled threats to the chairman of the Fed, the Fed is put in a position where they have to respond appropriately without getting into a battle in public. The second is the issue of European Central Bank interest rate drops. You could argue that they are, in essence, devaluing the currency, but this is rational behavior for a section of the globe that is seeing slowing growth. And arguably that slowing growth is occurring because of tariffs. It’s Economics 101. They are reacting and responding rationally. This is not retaliation by any stretch. And it’s disingenuous to expect them to do otherwise. In fact, the concern is if we decide to play tit for tat and lower our interest rates prematurely, thereby devaluing our currency, then we’re in this game that was played in Latin America in the 1990s, and is somewhat being played today by Venezuela and Argentina. This playbook does not end well.
The Feds made a response to the president’s statement and to a very real challenge in Europe. Even though there’s not a cut in interest rates, the market is clearly giving the Fed its thumbs-up to this decision. Let’s hope that the Fed continues to hold the line, both on interest rates and a strong dollar, and continues to make rational, realistic responses to actual economic events.
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