Interest Rates as a Shock Absorber
The US Federal Reserve Board (Fed), headed by Chair Janet Yellen, significantly influences interest rates in the US. As the economy has steadily improved over the past several quarters, the Fed has been signaling that interest rates would be allowed to rise. That is, until Gross Domestic Product statistics were released several weeks ago. The data showed a pause in the expansion. Shortly thereafter, Fed mouthpieces began to telegraph that the expected engineering of interest rate increases might be put on pause or delayed.
As a practical matter, the economy is dynamic and diverse – much like an organic system. Changes are a constant and new developments must be closely watched. Were the Fed to embark upon a policy without giving consideration to these new developments (or, be inflexible), it could exacerbate a downtrend (or, for that matter, cause inflation).
It is therefore critically important that markets understand that the Fed is monitoring developments. It is even more important though, that the markets have confidence that the Fed will act appropriately and with prudence. As professional investors, we monitor Fed pronouncements closely as actions by that body will impact client portfolios.
All questions and comments are welcomed.
Bob Bilkie, CFA®