- On 30 January the Federal Reserve left rates unchanged and said it would be ‘patient’ before further increases.
- Stock markets recovered part of what they had lost in December, although the change of tone is no guarantee.
- It is a good moment to review the structure of debt: how much is at a fixed rate, how much at a variable one and which maturities fall due.
On 30 January 2019 the US Federal Reserve left interest rates unchanged and announced that it would be ‘patient’ before approving further increases. The message was clear: the central bank was in no hurry to keep tightening its policy and preferred to wait and see how the economy evolved. Stock markets recovered part of what they had lost in December. In the following days, analysts read every word of the statement in search of nuances, as is usual when a central bank’s message changes tone.
A single word, ‘patient’, shifted expectations in the markets. That this happens says a lot about how central banks work today: their communication is part of their policy. For anyone with debt, deposits or investments, understanding the message helps to place the environment in which decisions are made, as long as one remembers that a signal is not a commitment. It is a good reason not to take one day’s headline as the basis for a long-term financial decision.
What ‘patient’ meant
Central banks choose their words carefully, because markets read them as a guide to what lies ahead. Saying it will be ‘patient’ before raising rates again amounts to signalling that there is no hurry and that it will wait to see how the economy and inflation evolve before tightening monetary policy again. In practice, a patient central bank conveys that it is committing not to a timetable but to the data as it arrives.
It is deliberately cautious language. The central bank does not commit either to raising or to cutting, but indicates its disposition at the time and which data it will watch. That is why the message can change if circumstances change, and markets know it: they react to the signal, but remain alert to every new figure that could make the institution change its mind.
Why it matters to a company
Benchmark interest rates influence the cost of financing, the price of mortgages and the return on deposits. A more cautious central bank usually eases the pressure on anyone with variable-rate debt, although nothing guarantees that the change of tone will last. The direct effect is on the dollar; on the euro, it is indirect.
For a company, the point is not to guess the Fed’s next decision, but to know how much it would be affected if financing became dearer or cheaper. A small business with a variable-rate loan and another with fixed-rate debt experience the same headline very differently, and a saver with deposits perceives it the opposite way to a borrower. That difference of perspective explains why the same news can be good for some and less good for others.
Reviewing debt
It is a good moment to go over how financing is structured: how much is at a fixed rate and how much at a variable one, which maturities fall due in the coming years and how much room is left if conditions change. That review costs nothing and avoids surprises, especially when several loans coincide in the calendar. It is worth noting the review dates of each loan and checking whether the terms allow renegotiation or partial early repayment without high costs.
It is also worth looking at the other side of the balance sheet: where the cash is, what return it offers and for what period it is needed. With an adviser, the relationship between debt, liquidity and objectives can be put in order without betting on what central banks will do. A balanced structure withstands any change of tone better.
Central bank messages are a signal, not a promise.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
