Don’t expect the U.S. Federal Reserve to hike rates next week during the March FOMC meeting. But while low interest rates are great for stocks, the Fed’s dovish turn means it thinks the economy is too weak.
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The Fed was initially expected to hike rates at least two times this year. But investors are breathing a sigh of relief over next week’s FOMC meeting. That’s because Fed Chair Jerome Powell is expected to hold off on announcing any additional interest rate hikes.
While that’s great news for immediate returns, savvy investors aren’t getting too comfortable.
You see, the Fed’s sudden change in tune is a sign that there may be trouble under the hood for the American economy…
Low Interest Rates Could Mean Trouble on the Horizon
Last September, markets shook on reports that the Federal Reserve intended to raise interest rates three times in 2019.
Citing robust economic growth and hiring, the FOMC indicated that the Fed’s interest rate would push toward 3.1% by the end of next year.
These predictions sent the Dow Jones tumbling into a correction in October. Higher interest rates make borrowing money more expensive, which makes it harder for companies to finance growth. And after a decade of low interest rate–fueled growth, more rate hikes could signal the end of the record-long bull market.
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However, the Fed’s aggressive approach has softened since October.
At an economic research summit last week, Powell said in spite of the “favorable picture” the Fed has endorsed over the last year, there have been significant “cross-currents in recent months.”
He went on to say, “the Committee has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy.”
Expert Fed watchers have changed their predictions over the last few months too. They were all but certain the Fed would hike rates in 2019, but now they’ve completely reversed themselves.
Take a look at how quickly they changed their minds in the chart below…
The Fed’s new dovish approach has been great for stocks. Since Powell changed his tune in January, the Dow Jones has rebounded a robust 1,184 points.
Next week’s confirmation of a more cautious approach to interest rates is likely to add more jet fuel to this rally and send returns even higher.
However, it’s important for savvy investors to look at Powell’s comments in the bigger picture.
You see, Powell is suggesting he sees something wrong with the nation’s economy.
And it looks like he’s on to something.
Last Friday (March 8), the Labor Department released February’s job report.
Contrary to expectations, the report showed that the nation only added 20,000 payroll jobs in January – well below the average estimate of 180,000.
Although February’s report still adds another month to 101 months of job growth, the sudden slowdown in hiring suggests that the decade-long run of economic growth is losing steam.
Combined with ongoing Chinese trade tensions, overextended tax cuts, and weakening growth around the globe, last week’s jobs report suggests that there’s a perfect storm of economic upheaval on the horizon.
And even if the Federal Reserve does surprise the market and raise interest rates tomorrow, that isn’t a sure sign that the American economy has room to run.
In fact, a rise in interest rates next week would likely spark the sell-off that is increasingly likely due to worsening economic conditions.
It’s a catch-22 for investors. Low interest rates are better for stocks, but the Fed’s sudden reversal on hiking rates means it thinks the economy is weakening. And while an interest rate hike might mean the Fed is content with the economy’s strength, higher rates will put a lid on stocks.
That means it’s a good idea for investors to make sure their portfolios are protected from the worst-case scenario…
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