The lack of volatility in the stock market in the wake of the US Federal Reserve’s rates pause could prove beneficial to fintech investment, according to Mayra Rodriguez Valladares, managing principal at MRV Associates and former New York Fed analyst.
“This is a good year for fintech, especially regtech, said Valladares, in an email. “The Federal Open Market Committee (FOMC) minutes showed that the Fed is paying attention to the stock markets and will pause on raising rates. The Fed will probably only raise rates once this year. If financial institutions see less volatility in the stock market, they are likely to spend more on fintech services.
“Financial institutions, especially banks, have a lot of problems with legacy systems and data. There are still rules written by regulators that financial institutions, especially banks, will have to comply with. Fintech companies are much nimbler and can provide a lot of services to banks.”
According to the minutes, released last week, Federal Reserve officials split into two opposing groups about future interest rate hikes. The first camp was of the belief that rate increases would only be needed if inflation outcomes were higher than forecast. The other wanted to raise the federal funds rate later in 2019.
Fed chairman Jerome Powell indicated last year that 2019 could see two interest rate hikes, but added that patience posed “few risks at this point”. “Inflation pressures were muted, and asset valuations were less stretched than they had been a few months earlier,” Powell told a press conference in December.
“Stock market bulls loved the message they heard from the Fed [in the minutes],” said Robert R Johnson, professor of finance at Heider College of Business, Creighton University, in an email. “For the first time in several months, the Fed made it clear that it did not have a bias toward increasing rates. In fact, it removed language from its statement that it might need to raise interest rates later this year.
“It is clear that there is a debate within the Fed whether the next move should be a rate increase or decrease. While the US economy remains strong, slowing global economic growth is definitely a concern and is resulting in the Fed being cautious about continuing to raise rates,” wrote Johnson. “The minutes confirmed that the Fed will be extremely patient and data dependent regarding any future interest rate changes.
“It is also clear that the Fed is monitoring the financial markets and that recent financial market volatility was likely a factor in the Fed moderating its course. Additionally, the Fed provided the markets with some good news regarding the unwinding of its balance sheet. They indicated that the unwinding — which had markets concerned — may end soon and that more clarity will be forthcoming.”
President of the New York Fed, John Williams, said at a monetary policy event last week that soft inflation readings could negatively affect the perception that the Federal Reserve will hit its 2% goal. Williams also welcomed an upcoming review of the US Monetary Policy Framework, set for later this year. “A number of alternative frameworks and strategies have been proposed that hold the promise of better achieving the inflation goal and holding fast the inflation anchor,” he said.