Quiet Creeping on U.S. Indices as Fed Relaxes Grip on Interest Rates


Today it’s all quiet on the Western front, as major indices like the S&P 500 and Dow Jones industrial average stick right around their respective round numbers.

However, looking down the pike, if there’s one thing that’s going to change markets, it’s changes in Federal Reserve interest rates.

Anyone who is investing in U.S. exchanges and equities should look closely at how the Federal Reserve may raise interest rates in the future.

At the beginning of this year, we’re seeing a commitment by the Federal Reserve not to raise rates in the near term.

Just a few days ago, USA Today and other venues reported that Federal Reserve chair Jerome Powell said the pause in interest rate hikes was independently pursued, and not influenced by the bellicose remarks of the president and abrasive comments about Powell and the Federal Reserve.

So with that commitment to keep current interest rates, the market is seeing green. However, in the longer term, we’re likely to see rates go up in 2019.

“The Fed has been anxious to return rates to the healthy 2-3 percent level,” wrote Kimberly Amadeo in The Balance in January.

As Amadeo points out, the current 2.5% rate is below what the Federal Reserve would like to see eventually, partly just to get parties to invest money instead of keeping it rolled up under a mattress.

“(The Fed) wants to get the economy out of a possible liquidity trap,” Amadeo wrote. “That’s when families and businesses hoard cash instead of spending it. Low interest rates don’t give them much incentive to invest. The only way out of a liquidity trap is to raise interest rates.  … The Fed also wants to raise rates because it’s been talking about it for more than a year. In response, forex traders expected the dollar’s value to rise. To take advantage of that, they shorted the Euro. That strengthened the dollar 25% in 2014 and 2015. The strong dollar hurt exports and slowed economic growth. It also created lower import prices. That reduced the chance of inflation. If people expect prices to stay the same or drop, they have less incentive to spend now. They know their purchase might cost less in the future.”

So although we have these assurances that the Federal Reserve is leaving interest rates where they are for now, it’s in the best interests of investors to keep their eyes peeled for any potential news that that policy is subject to change.

That includes trying to evaluate what the White House wants, as well as the habits and preferences of various department heads that seem to move in and out of this administration’s cabinet like a revolving door.

In the meantime, short-term buy stocks, according to some analysts, are some of those big tech movers that are buttressing our economy like Facebook, Google and Apple. One short-term loser is Boeing, which is crashing after tragic aircraft loss. Stay tuned for more on the U.S. indices and related stock market analysis through the week.