In the U.S., inflation has broken beneath the 3% barrier for the first time in four years, posting an increase of 2.5% in August. Over the last two years, the Federal Reserve has been on a quest to contain inflation by tightening financial conditions. In September, the Fed eased monetary policy by lowering the federal funds rate. Other central banks are adjusting monetary policy as well, but not for the same reasons. How will the new wave of global interest rate adjustments affect your portfolio?
The Federal Reserve raised the federal funds rate 11 times since it first began raising rates in March 2022. On Sept.19, the Federal Open Market Committee announced a rate reduction of 0.5% to the federal funds to bring the key rate down to a range of 4.75%-5%.
The Fed directly influences the federal funds rate, while other rates are set by investors. The federal funds rate is the overnight rate that banks charge each other for short-term loans to maintain reserve requirements. For example, a bank with excess reserves can lend those reserves to another bank that might fall short of meeting reserve requirements after end of day transactions settle.
The Federal Reserve has two mandates from Congress: maximum employment and price stability. With the most recent inflation reading at 2.5%, and the Bureau of Labor Statistics reporting the unemployment rate at 4.2% in August, it appears the Fed is on its way toward meeting those two mandates and, perhaps, helping the U.S. economy circumvent a recession.
You can read the full article by Senior Portfolio Manager, Director of ESG Strategies Andy Drennen in the Springfield Business Journal. Shared with permission from the Springfield Business Journal.
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