The Federal reserve recently changed it’s position on interest rates. It abruptly went from a policy of increasing rates in an effort to slow the economy to stating rates are at an appropriate level and they are taking a pause from further rate hikes. With the world economy cracking and the United States economy still clicking along fine, the policy change looks appropriate. So what’s the conundrum?

In my opinion, the reason the Fed is being cautious is that they have limited resources to fight a recession. Rates are still very low relative to historical levels and if the United States economy begins to slide into a recession the Fed does not have significant rate cutting ability. Rates are already low and the Feds balance sheet is still relatively bloated from the bond purchases it did coming out of the 2008 financial crisis. If bond purchases are not a good option and it’s rate cutting ability is limited, how does the Fed fight the next recession? Their first and possibly best option appears to be to avoid it. And with that said and the economy still clicking along fine; this market has room to run.