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HomeEconomyThe Federal Reserve's 'Balancing Act': Steady Rates Coupled With Future Hike Signals

The Federal Reserve’s ‘Balancing Act’: Steady Rates Coupled With Future Hike Signals

David Rosenberg, esteemed economist and President of Rosenberg Research has some intriguing insights about the latest Federal Reserve policy moves. He commended the Fed for its skill in adjusting policy without actually making immediate changes – a sophisticated dance of sorts with interest rates.

In his words, “The Fed is a genius. It found a way to tighten policy without tightening policy!”. This observation was made following the Fed’s decision to maintain steady interest rates this week, despite indicating potential hikes in the near future. This strategic move is seen as a way to subtly influence the market’s perception, giving the impression of policy tightening while keeping rates stable.

Wednesday saw the Federal Reserve break a pattern of 10 consecutive hikes over the last 15 months, instead opting to maintain the current rates. Despite this, the Fed also forecasted two more quarter-point increases before the year concludes.

Rosenberg suggests that this blend of steady rates and future hike signals could be an intentional strategy to keep speculation in check. It prevents the market from prematurely concluding that the central bank is wrapping up its phase of policy tightening.

In Rosenberg’s tweet following Chairman Jerome Powell’s press briefing, he shared his theory, “I’m thinking this move to signal two more hikes was a strategy to ensure that the stock market didn’t soar on the “pause” (okay, call it “skip”) as every Tom, Dick, and Harry strategist was telling investors always happens when the Fed moves to the sidelines.”

Rosenberg, over recent months, has maintained the stance that the Fed’s rate-raising efforts have been sufficient. The central bank has boosted rates from virtually zero to over 5% since last spring in an attempt to control inflation. This inflation, which peaked at four-decade highs in 2022, is now on the downswing.

It’s important to understand that higher rates often decelerate the rise in prices as they promote saving over spending and make borrowing more costly. While these rates are beneficial in controlling inflation, they also diminish demand across various sectors of the economy, thereby affecting the prices of assets, including stocks.