What Is a Fed Pivot?

A Fed pivot occurs when the Federal Reserve, which is the U.S. central bank, reverses its policy outlook and changes course from 澳洲幸运5官方开奖结果体彩网:expansionary (loose) to 澳洲幸运5官方开奖结果体彩网:contractionary (tight) monetary policy—or, conversely, from 🌄contractionary to expansionary.

A♈ Fed pivot typically happens when e𒐪conomic conditions have fundamentally changed in such a way that the Fed can no longer continue its prior policy stance.

How a Fed Pivot Works

The Federal Reserve is the U.S. central bank, meaning that it is in charge of the nation’s 澳洲幸运5官方开奖结果体彩网:monetary policy. The Fed has a 澳洲幸运5官方开奖结果体彩网:dual mandate: to maintain both price stability and full employment. If 澳洲幸运5官方开奖结果体彩网:inflation rises and unemployment falls, the economy may overheat, so the Fed will enact a tight, or contractionary, monetary policy—such as raising 澳洲幸运5官方开奖结果体彩网:interest rates—to try to slow economic growth and let the economy cool. Likewise, if inflation is low and 澳洲幸运5官方开奖结果体彩网:unemployment is high, the Fed may enact a loose, or expansionary, monetary policy to stave off 澳洲幸运5官方开奖结果体彩网:recession by lowering inte🅰rest rates and pumping more money into 🐠the economy.

Once a monetary policy has been set and implemented, it can take several weeks or months before the effects of the policy are felt in the economy. Once they are, the Fed typically maintains its existingꦆ policy to some degree to maintain stability and avoid spooking the markets.

However, if the fundamentals of the economy shift dramatically, the Fed is forced to reevaluate its position and may decide to pivot—that is, to reverse its monetary policy stance. Thus, if interest rates are low and the Fed is employing 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE), it would pivot by increasing interest rates and tapering QE. A pivot in the other direction would entail the reverse. In eitherඣ case, doing so can be disruptive in the short term as market expectations and business forecasts are revised in light of the new policy.

Examples: Why and When the Fed Pivots

The Fed currently has set a 澳洲幸运5官方开奖结果体彩网:target rate of inflation at 2% annually, and it seeks to maintain full employment. As a result, it will shape its monetary policy in reaction to the state of the economy and its forecasts about the future. This includes setting interest rates, in the form of targeting the 澳洲幸运5官方开奖结果体彩网:federal funds rate, or the short-term interest rate at which commercial banks borrow and lend to one another. When the economy is expanding, the Fed can raise rates and෴ keep them relatively high, and when the economy is slowing down or contracting, the Fed can ins✱tead lower rates and keep them low.

Let’s look at some recent examples using the chart below, which depicts the fed funds rate since January 2000. In late 2000 into 2001, the 澳洲幸运5官方开奖结果体彩网:dot-com bubble burst, sending the U.S. economy into a mild recession. Toward the end of 2000 and through 2004, the Fed pivoted to a loose monetary policy, cutting interest rates to 1.0% from 6.5% over a period of more than 36 months and maintaining its policy stance until the summer of 2004. That’s when it again pivoted and began increasing interest rates, to 5.25% from 1%, again over a period of around three years as the economy grew.

Due to the 2007–2008 financial crisis, the U.S. economy entered a deep contraction, known as the 澳洲幸运5官方开奖结果体彩网:Great Recession. During this time, unemployment was high, economic growth lagged, and inflation fell well below its 2% target, where it remained for several years. As a result, the Fed pivoted from its prior policy and again slashed interest rates, this time down to a record low 0%–0.25% target. This expansionary policy stance persisted for nearly a decade before the Fed slowly pivoted and raised rates again, reaching around 2.5% in 2019.

In the spring of 2020, the global COVID-19 pandemic rocked the economy, as lockdowns and business closures put a halt to the slow and steady economic expansion that preceded it. The Fed promptly pivoted and again quickly cut rates to close to 0%, where they again remained until the spring of 2022. In early 2022, inflation began creeping up and then exploded higher that summer to levels not seen since the early 1980s. The causes of this sudden rise in prices include Russia’s invasion of Ukraine, which sent food and fuel prices soaring, coupled with employment and global logistics snarls that have remained since COVID lockdowns. This caused the Fed 澳洲幸运5官方开奖结果体彩网:to once again pivot and aggressively raise interest rates in an effort to tamp down rising prices.

The Bottom Line

A Fed pivot involves the U.S. central bank changing course and reversing its prior monetary policy stance. If the economy appears to be entering a recession, the Fed may pivot from a high interest rate environment to an 澳洲幸运5官方开奖结果体彩网:accommodative monetary policy, featuring lower interest rates, increased 澳洲幸运5官方开奖结果体彩网:open market operations (OMO), and quantitative easing (QE).

Alternatively, if the economy seems to be overheating, with low unemployment and high inflation, the Fed may instead pivot from low interest rates to a contractionary policy, involving higher interest and tapering of QE and OMO. Fed pivots are done in reaction❀ to the state of the economy, but if they come too late or are not aggressive enough, then they may not be able to keep up with changing fundamentals.