How Long Will the Federal Reserve Hold Off On Interest Rate Hikes?

No one knows.  While conflicting opinions are rampant, just watch CNBC, history suggests that predicting future Federal Reserve moves is a good way to get your head handed to you.

In trying to anticipate potential future changes in interest rates, investors might be well advised to consider the Fed’s mandate.

The U. S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates.  The first two objectives are often referred to as the Fed’s dual mandate.

While the mandate may seem to be clear, trying to assess where the economy is currently, and how the Fed may see the future, is not so simple. 

Take the employment numbers.  Should investors focus on an official unemployment rate of less than 6.0%, previously a signal for some Fed tightening, or should the focus be on the unusually low level of labor force participation, currently at less than 63%?

Similarly, the outlook for price stability is equally muddy.  Anyone who frequents supermarkets knows that prices have been going up and package sizes have been going down.  Never-the-less, reported consumer price statistics suggest that, overall, inflation is modest at best.  However, oil prices, and therefore gasoline prices, have cratered over the last several months.   In addition, prices for some other major commodities, such as copper, are also well below recent highs.

Given the foregoing, what is the Fed likely to do?  Who knows, but the best bet is that, over the near-term, they will do nothing, but will continue to monitor changes and, as greater clarity emerges, adopt the appropriate strategy.

Investors should pursue a similar strategy.  Monitor changes in key economic data, recognizing that there are likely to be frequent restatements, and then adjust portfolios to reflect new information.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®