Consider a growing economy. Money velocity is increasing. Wages are increasing. Debt and credit are expanding. During these times, the Federal Reserve can do one of two things: hold the Federal Reserve Rate stable or increase the rates to try and slow down the growth.
Now consider a shrinking economy. Money is contracting. Wage growth has halted. Debt and credit are retreating. During these times, the Federal Reserve can do one of two things: they could hold the Federal Reserve Rate stable or decrease the rate to encourage credit and lending.
You get the idea? The Fed can always take a “wait-and-see approach." Today there is a good argument to do either. They could increase or decrease rates.
These are not usual times. The Federal Open Market Committee meeting is tomorrow (6/19) and analysts are poring over individual touchstone words from Chairman Powell like “neutral”, “flexible”, or “patient” to try and guess what direction he might steer rates. Again, by all fundamental measures, growth is currently slow and steady – in the 2.0%-2.5% range. These are the sort of GDP rates which a few short years ago prompted prudent, deliberate increases in the Fed Rate. But now? Who knows?! Will the Fed try to pre-empt of a potential recession that hasn’t occurred – not at all – by cutting rates? The market is moving hundreds of points today as investors are trying to outguess the Fed.