The Federal Reserve Board is meeting this week with an announcement to be made on Wednesday. Many times, there is a lot of drama and speculation surrounding these meetings. We believe the die will likely have been cast before the meeting happened. The markets truly believe that the Fed must lower short-term interest rates. After all, it is the markets which have driven down long-term rates significantly over the past several weeks.
Had the jobs report came out to be a shocker on the strong side, perhaps there would be more debating. But even outside the employment numbers, we have seen evidence of a slippage in economic growth. Consumers are still spending, but business investment is weak, and the housing sector has lost its vigor over the past year. Though, it remains to be seen whether these lower long-term rates will insert some life into the housing sector. Certainly, there is some recent evidence of this happening.
One thing to keep in mind. The Fed lowering short-term rates will not necessarily cause long-term rates to fall further. The markets have made their move in anticipation of the Fed moving. If for some reason they did not lower rates, we could see long-term rates rise. This would be especially true if the Fed’s announcement indicates that the economy is on sound footing and more help is not needed. As a matter of fact, with the die likely cast, the wording of the announcement is more likely to move the markets than the rate decision.