Decoding the fed... What yesterday’s commentary from the Federal Reserve means to you
Bottom Line: It’s been awhile since I’ve done an edition of “decoding the fed”. Mostly because the fed hasn’t been near as cryptic since Janet Yellen was sent packing. It’s been clear that rates would continue higher as the economy would keep growing. Yesterday Federal Reserve Chairman Jerome Powell said something that was a bit of a game change. He said the Federal Reserve interest rate, the rate the fed charges the lenders you borrow from, is “near neutral”. So, in English what does that mean?
It means that interest rates are likely about as high right now as they’re going to be for the foreseeable future. If you have variable rate debt this is great news for you. Also, if you’re looking to borrow in the near future – it's also an indication that you don’t have to worry about rates getting away from you here. At most the fed would raise rates by a half of a percent over the next year and even that won’t likely happen. What’s surprising about this is that the current interest rate, just below 2.5%, is far lower than the last time we had a 3% plus growth economy in 2005. Back then the rate was above 4.5%.
That’s the reason you saw stocks post their best day in eight months. It was a true surprise to investors and lenders. This also means that variable rate debt products are a viable option again.