With So Much Riding on the Fed’s Moves, It’s Hard to Know How to Invest
What You Don’t Know About the Fed Is More Important than What You Do Know.
If you thought the Fed’s first policy of raising interest rates in six years was the beginning of a major financial transformation, the Fed’s second action of shrinking its balance sheet in about three months might be its end.
The Fed was supposed to do something about the financial crisis in September. Instead, its moves in September and October led the market into a tailspin.
The Fed’s action in September surprised markets, and it was followed by the Fed’s second policy of shrinking its balance sheet, after the Fed’s bond buying program in June added to the debt problems in the banking sector. The move caught markets off guard.
What’s Next For the Fed?
The Fed’s policymaking team, as you might expect, was caught by surprise by the Fed’s moves.
At its December 19 announcement, the Fed announced that it would begin slowly raising interest rates. This is in contrast to its July announcement of a 25-basis-point hike.
The Fed believes rates should be kept near around zero, yet the Fed’s move makes the Fed seem less aggressive than it is.
After the second move, the Fed’s policy committee indicated that the Fed was “likely to begin gradually raising the federal funds rate” in mid-January. But the committee also said that it expected that the pace of raising the federal funds rate could be “accelerated if necessary.”
The Fed was so intent on moving slowly — a slower pace than it originally planned — that it didn’t raise rates faster than expected. The Fed’s policy committee indicated that the Fed might begin to hike rates as early as 1 month ago — in late January or early February. The Fed had planned to raise rates by about half of 1% on December 21 by the end of the month.
The Fed could be moving even earlier. Last November, the Fed raised the federal funds rate for the first time