For many investors, traders and market watchers, the words of the Federal Reserve or the ‘Fed’, carry significant weight. Even the slightest change in tone from the central bank can have an immediate impact on markets. As such, there is a long-held theory that the Fed uses its language to control markets, often threatening to raise interest rates as a way to guide investor behaviour, without following through on those threats.
Given these positive economic indicators, many questioned whether the Fed intends to follow through with its aggressive rate hike strategy. It’s worth noting, however, that the Fed’s primary mandate is to maintain price stability and maximum employment. Inflation, while currently receding, remains well above the Fed’s target rate. Furthermore, analysts are concerned that continued economic growth could lead to further price increases.
Another reason is the size of the US national debt and the trajectory of interest costs. With debt of more than $30 trillion and interest costs on that debt projected to increase, the Fed has a significant incentive to keep interest rates low. Higher interest rates would increase the cost of servicing the national debt and lead to a slowdown in economic growth, making it even more difficult to manage the debt.
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