Created by Congress in 1913, the U.S. Federal Reserve acts as America’s central bank. As part of its mandate, it serves as the decision-making body for U.S. monetary policy. Its primary tool in implementing this policy is the management of the benchmark fed funds rate, upon which short-term debt is often based.

By influencing the availability and cost of credit, the Fed seeks to manipulate spending, investment, employment and inflation to foster economic growth and stability. Lower interest rates on credit induce consumer spending. Conversely, raising the cost of debt acts as a deterrent, as higher borrowing costs reduce consumer spending on goods and services.

From January 2017-December 2018, the Fed enacted seven 0.25% interest rate hikes. The Fed justified its rate hike agenda by pointing to the continued strength of the U.S. economy. By raising the cost of borrowing, the Fed argued, it could gently tap the brakes on economic growth and inflation, preventing the economy from overheating.

The Fed received tremendous criticism for its interest rate hikes. President Trump, along with many Wall Street heavyweights, argued that rate hikes were not necessary. Yes, the economy was strong, but there was no indication of overheating — which comes in the form of inflation, as strong consumer demand drives prices for goods and services higher. If inflation is too high, rising prices outpace consumer wages, eroding Americans’ buying power.

But inflation has yet to exceed the Fed’s 2% target rate. In fact, inflation hasn’t exceeded 2% since April 2012. Critics of the Fed have long argued that America’s trade disputes and a weakening global economy already act as a constraint to keep economic growth and inflation in check. Thus, they argue, the Fed’s rate hikes were unnecessary and unduly hurt American consumers and businesses.

For the past six months, the Fed has been at a crossroad on its interest rate policy. Based largely on its advocacy for additional interest rate hikes in 2019 and 2020, from Oct.3-Dec.24 the Dow Jones Industrial Average (DJIA) collapsed, falling 5,036 points and losing almost 19% of its value. After witnessing this year-end carnage, Fed Chairman Jerome Powell stated the Fed would now take a more patient, wait-and-see approach to future rate hikes. The stock market’s response was immediate, helping propel the DJIA to its best first quarter results in almost a decade.

The Fed has made yet another pivot to its interest rate policy. On June 4, Chairman Powell stated the Fed will act accordingly to keep the nation’s current economic growth going. The markets quickly interpreted this statement as the Fed would soon begin cutting interest rates to further stoke the U.S. economy, which remains straddled with trade disputes and global economic weakness. Currently, the markets are assigning a 28% chance of two rate cuts and a 38% chance of three rate cuts by the end of the year.

While implementing its interest rate agenda, the Fed must walk a tightrope of balancing economic growth and inflation. The ideal pace allows for a steadily growing economy that keeps excessive inflation in check through targeted and measured interest rate adjustments. If the Fed raises rates too fast, it risks prematurely stunting economic growth. Too slow, or if the Fed starts to cut rates, it risks the economy overheating with runaway inflation. Each scenario would force the Fed to take more sudden and drastic measures to correct — greatly impacting the economic welfare of our nation. This time, let’s hope the Fed finally gets it right.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.