A Fed pivot means that the central bank has changed the direction of monetary policy. It usually happens when economic conditions or expectations for economic growth change.
Basically, the Fed can raise interest rates when the economy is growing rapidly and lower them when the economy slows down. Because rapid economic growth leads to a decrease in unemployment and an increase in average hourly earnings. Although this data is positive, high inflation is inevitable in economies with high employment rates and hourly earnings. Thus, it is expected that economic activity will be restricted by raising interest rates, the growth and labor market will decline, and the inflationary environment will improve.
In economies with high interest rates, interest rates can be lowered, allowing the market to borrow at low interest rates. Companies or entrepreneurs that can borrow at low interest rates provide employment and economic growth by investing. Economic growth strengthens the labor market. Average hourly earnings increase in economies with more employment opportunities.
It’s called a “pivot” when the Fed starts lowering interest rates instead of raising them, and vice versa. For example, when the economy is growing rapidly, even though the Fed is determined to raise interest rates, it begins to lower them as the economy slows down. In this example, the Fed pivots.
A Fed Pivot is important for the economy, as the direction of the interest rates is a key indicator for economic growth and inflation expectations. Therefore, when the Fed pivots, it plays a critical role in predicting the future performance of the economy.
What Is the Latest on Interest Rates?
As of January 2023, the Fed funds rate is between 4.25% and 4.50%. The Fed may raise interest rates by a total of 0.75% in 2023, in line with the expectations. So, interest rates can reach 5% or 5.25%.