It is not often that news about central bank policymaking has the potential to have an explosive impact on markets, but that is exactly what we saw last week when the Federal Reserve announced it would not be making any changes to the target interest rate range. The market response was swift and passionate. While some economists have interpreted this statement as a signal that the Fed is becoming more hawkish, others have argued that the central bank may in fact be signaling that it is preparing to shift towards a more dovish stance in the future.
The fact that the Fed left the target rate range unchanged has led some experts to theorize that the US central bank may be nearing the end of its current rate-hiking cycle. This could mean that the Fed, which has increased rates nine times since 2015, is beginning to worry that it may be raising borrowing costs too high, leading to a cooling of the economy. Some economists have also suggested that the Fed may be approaching the so-called “neutral rate”, which many believe to be somewhere between 2.5% and 3% – a level at which the central bank can neither raise or lower rates without having an impact on economic output.
Other signs that the Fed may be nearing the end of its latest rate-hiking spree include the fact that inflation has been surprisingly subdued despite the large number of rate increases. This could indicate that the Fed’s policy has been more effective than anticipated, allowing for a more gradual approach towards normalizing borrowing costs. The fact that the Fed has also been reducing its balance sheet, a process which some economists have argued reduces its ability to provide monetary stimulus, may also be a sign that the central bank is winding down its current rate cycle.
Of course, it is impossible to know for certain what the Fed is planning. It is possible that the central bank will continue on its current path of gradually raising rates for some time, or that it may decide to make a sudden shift and pause the rate-hiking process. What is clear, however, is that the Fed’s recent announcement has opened the door to a variety of scenarios that could affect markets for months to come. Whatever the case may be, it is important to keep an eye on developments in the US central banking system as they could have a significant impact on the economy.