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Why the Fed Hit the Pause Button

June 28, 2023 - 2 MINUTE READ

The Federal Reserve has decided to take a break from raising interest rates after more than a year of increases. There are several reasons for this decision. 1Firstly, the job market is strong, with the unemployment rate at a low 3.7%. The Fed wants to maintain this positive employment situation. Additionally, inflation rates for both consumers and businesses are coming down, which means there is less urgency to raise interest rates to control inflation. The Fed also wants to take some time to assess the impact of its previous interest rate hikes on the economy before making further adjustments.

1Looking ahead, the Fed's forecast indicates that the benchmark interest rate may reach 5.6% by the end of the year, suggesting a potential increase in the future. However, economic forecasts can change based on evolving conditions. 1Furthermore, the Fed's economic projections no longer indicate a recession, indicating a stable economy that may not require immediate tightening measures. Lastly, the forecast for gross domestic product (GDP) growth has improved, suggesting stronger economic expansion. These factors contribute to the Fed's decision to pause interest rate hikes.

 

The biggest beneficiaries of higher rates have been those who invest in bonds for income or other fixed sources such as fixed annuities and CDs. Since rates began to rise in 2022, US stocks have struggled in this new environment. As rates have risen, earnings of companies have been affected in the short term, as their costs have increased. While some investors may be cheering the Fed pausing, this doesn’t mean rates can’t be raised in the future.

Sources:

1https://www.fidelity.com/learning-center/trading-investing/the-fed-meeting

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