The Fed recently took a sharp turn in its monetary policy-making, stating that it has no plans to raise rates later this year, a jarring contrast to its previously hawkish tendencies.
Much to the delight of investors and stakeholders who have been speaking out against the escalating interest rates, markets have thus far been reacting well to the turn in policy.
Equities are at a 5-month high, while the dollar has bounced back after sliding for some time. While government bonds have recently stabilized, yields had initially declined due to a dip in investor confidence owing to the sudden nature of the announcement.
"It's a confirmation that the market was right that we didn't need such aggressive Fed policy," said Hank Smith, co-chief investment officer at Haverford Trust. "The expectation is the Fed is out of the picture for the remainder of the year. That risk, if you want to call it that, is off the table and now we move to trade."
That said, there are conflicting views on the reaction of the markets in light of the change. Initially, stocks dwindled as investors still had concerns about China and the trade war, as well as weakening consumer confidence. However, the markets were simply delayed in pricing in the new policy, as stocks rose the next day.
Even so, it's worth noting that the Fed also forecasted US economy growth at 2.1%, which is almost a percentage point below White House estimates. This caused the yield curve to flatten due to pressure from treasury bond yields and the dollar to fall, as there were inconsistencies between national and economic estimates.
"It may be some time before the outlook for jobs and inflation calls clearly for a change in policy," Fed Chair Jerome Powell said. "Patient means that we see no need to rush to judgment."
It must be kept in mind that the policy doesn't call for a full-on rate-cut; it's simply an indication that there's a need to pause and evaluate. While markets are currently doing well, the fact that the Fed doesn't want to push hikes indicates that inflation is under control. However, it may also allude to a forthcoming recession.