On Wednesday, the Federal Reserve decided that they were going to keep the federal funds rate unchanged for the time being. They said that they are confident the economy will rebound in the spring and summer months after the sluggish first quarter from January to March of this year. Many believe that this sluggish behavior in the economy is just transitional and consumer confidence will increase as many of President Trump’s plans are fully rolled out. The Federal Reserve says that this sluggish behavior in the economy is only temporary and they plan on raising rates later this year. People knew that the Fed did not have plans to change rates on Wednesday, so the real question was what the future looked like for inflation and consumer spending.
The Fed expects that there will be a surge in the economy, which may perhaps come from President Trump’s new tax plan. But now it is the waiting game to see if the Fed’s expectations are correct or not. GDP only grew at a small pace of 0.7% in the first quarter even with surges in household confidence and a strong increase in stock prices. There are many mixed reviews as to whether economic growth will occur in the coming months even with a slight increase in consumer spending this past March. A forecast from the Macroeconomic Advisors showed that GDP could grow 3.8% at an annual rate in the second quarter and even the Atlanta Fed showed a model with a 4.3% growth.
Inflation also weakened in the month of March, while some believed inflation to ease due to energy prices, but it was not the case. Even with the uncertainty in inflation, many economists believe that the Fed has neared full-employment, which could be another reason why they kept interest rate unchanged since unemployment went as low as 4.5% in March. Whatever the Fed decides to do in the coming months, I think their decisions will stem from a lot of uncertainty and speculation. If unemployment continues to drop, it would make sense for them to take part in contractionary monetary policy and increase the federal funds rate. However, if inflation continues to fall, it would not make sense for the Fed to increase rates. We will have to wait and see what prevails as we move into the summer months, but I don’t think anything will be certain until Trump’s policies go into effect.