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A Beginner’s Guide to Monetizing a Hobby

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Making extra money from a side hustle can be extremely gratifying, especially if it’s something you love doing.

And it seems like it’s never been easier to pick up side gigs or monetize your hobbies. There are 57.3 million freelancers in the U.S., according to a 2017 survey commissioned by the Freelancers Union and Upwork, up from 53 million a couple of years ago. In 2017, they collectively earned $1.4 trillion.

Make no mistake: Hobby-based businesses can become big undertakings. Juggernauts such as Facebook, Chanel and Microsoft all have roots in personal hobbies.

The Panel Study of Entrepreneurial Dynamics II, a multiyear survey of nascent entrepreneurs, found that nearly 26% of budding U.S. entrepreneurs started their businesses from a hobby.

But turning your hobby into a business can get complicated, to the extent that it could kill your passion for it. It is, in the end, a commitment that requires hard work. With proper planning, you may be able to strike the right balance of success and satisfaction from monetizing your hobby.

Learn the essentials

We asked career experts and hobbyists-turned-business owners to share their advice and the lessons they learned about starting hobby-based businesses, to help you start off your endeavor right.

Do research, assess your goals

Benjamin Warnick, a professor of entrepreneurship and strategic management at Washington State University, told MagnifyMoney that once you add money into the equation, a hobby isn’t just about personal enjoyment anymore; it morphs into a business that needs to create value for customers.

“People aren’t going to pay you just to do something you enjoy,” Warnick said. “If you can find a way to identify what people value — [Ask yourself] ‘How can I make life better for them in some way and how can I tie my hobby to that?’ — then you are on to something.”

Anna Juhl, a former nurse manager, quit her job at age 52 to pursue her passion for cheese and travel, but she did so carefully. Juhl now runs a business called Cheese Journeys, offering cheese enthusiasts tours in European and American destinations. She didn’t act on impulse; she had a plan.

Anna Juhl in England on a scouting trip in preparation for her first cheese tour. (Courtesy of Anna Juhl)

Juhl, who ran an artisan cheese shop and restaurant in Salt Lake City back in 2000 after working her full-time job as a nurse manager, did her homework before piloting a cheese-themed tour to Europe in 2013. She knew that food travels were on the rise. And she was confident that and her expertise in artisan cheese and love for food and travel would give her an edge in the market.

When her husband’s job led them to New York in 2007, it was a good opportunity for her to leave behind her previous career, and Juhl started brainstorming a cheese-travel business. During the first six months, she found herself spending hours reading up on food, travel and everything she needed to know about running the business. With help from industry experts in Europe, who coached her through the basic tour process, she launched a pilot England tour in 2013, 15 months after quitting her job.

Juhl said she was lucky that she was able to pilot the business with her own savings instead of taking out loans. She had to cover a considerable amount of money upfront, and she lost money in the first couple of tours. The fact that her husband has a good-paying finance job also helps, although Juhl admits that the switch to full-time entrepreneur was not without stress: She didn’t take a paycheck for a few years and any money she made was invested back into the business.

Then again, Juhl’s initial goal was not to make profit, she said; rather, her new business was a transition into retirement. She was prepared not to make a profit the first few years as she worked toward building a business that would allow her and her husband to travel while having a steady stream of income at retirement.

Looking back, Juhl said self-assessment really helped her focus in this midlife career shift.

“Know what you want from it, how much do you want to work and set your own goal so you build a business that meets your goals and not the expectation of somebody else’s.”

Indeed, entrepreneurship demands a big-time commitment. The word “passion” has its roots in Latin, meaning suffering, Warnick pointed out, so hobbyists need to ponder how much they are willing to sacrifice before launching their leisure-based business.

Start small, test it out

Nancy Collamer, career coach and author of Second-Act Careers, told MagnifyMoney that it’s wise for hobbyists to start testing out businesses as a side gig in their free time.

“Let’s say you are great at baking,” said Collamer. “What you may want to do is just on a very small scale, offer your brownies for sale during the holidays to some friends.”

A side hustle allows you to gauge the market interest and to test out pricing, she said. Once you have a taste of it, put a little more time into the work than you would on a hobby basis. If it doesn’t feel right, stop right there before you waste too much money or time on it.

“Keeping one foot in stable employment can really help ease the transition,” Warnick said. “So if you have alternative sources of income, especially in the early stage of the business, you can explore and then gradually scale up the business, instead of putting tons of money into it and then realizing it’s not going to work.”

Expect challenges

You may be excellent at what you love to do, but a business is a business. When you try to commercialize your expertise, there is a lot more work that goes into the process than you would probably have expected.

“That’s everything from marketing your services to keeping your books to producing your products, to finding the cheapest materials, to keeping your office clean every day,” Collamer said. “You are doing it all.”

The business side of the hobby entrepreneurship — bookkeeping, accounting, digital marketing — can be really daunting.

“Curating, researching and building the tour, that was easy,” Juhl admitted, “Executing the tour, super fun. Doing all the other related business things can be challenging.”

Gianna Leo Falcon, a New York-based freelance photographer, told MagnifyMoney the learning curve was very steep for her, a person who’s not quite business-oriented.

Gianna Leo Falcon, a New York-based freelance photographer. (Courtesy of Gianna Leo Falcon)

Prior to becoming a professional photographer in 2015, Falcon did occasional freelance portraits and headshots. She recalls constant frustrations with clients who booked shoots but ended up not showing up. To protect herself, Falcon later learned to ask for down payments.

“I’m really an artist. I just want to show up and shoot,” she told MagnifyMoney. “Invoices and how to get paid online are really confusing. I’m navigating and learning that stuff as I go along.”

Outsource labor if needed

Experts say being your own boss not only requires possessing a variety of skills and knowledge of the business but also knowing your own strengths and when to outsource some of the labors you have no interest in or talent for.

“You don’t have to be able to do everything,” Warnick said. “So if you got the expertise in the domain of your hobby, maybe you could bring on someone who’s a little bit more of the business side who can help you commercialize the hobby.”

As Juhl’s business has grown, she hired a bookkeeper, a website developer and a publicist so she can focus on the centerpiece of the business — booking and executing the trips.

“It’s a personal relationship that I have with people who travel with me,” she said. “So I have to make sure that I’m available to do what my role is, really what I’m best at.”

Find your clients

For any business to succeed, you need to find people to buy your services. But where do you start? Here are a few ideas.

Find complementary service providers

A good place to start is networking with complimentary service providers, Collamer said.

For example, if you want to be a wedding photographer, find other people who offer wedding services, Collamer suggested.

“They are going to be thrilled to meet you,” she said. “Because if it’s someone who has a wedding venue and they meet with couples, you might become one of their preferred service providers and that becomes a steady stream of clients for you.”

Get involved in trade groups and associations

There are established associations and trade publications within almost every hobby, be it specialty foods or heavy machinery. Get involved with those communities because they might have information and resources you need to grow your business. Better yet, they may be able to refer you to potential clients.

“Don’t think you need to reinvent the wheel,” Collamer said. “There are lots of people who are already probably [having] successful businesses that are related to what you want to do that you can learn from.”

Prioritize marketing

Juhl said she had a hard time finding customers when she started her cheese-travel business until the marketing and media support came in much later.

A year into the business, she realized that relying solely on word of mouth was not enough to attract customers; marketing should be a crucial piece of a business plan. Juhl eventually joined American Society of Travel Agents and other travel organizations so she could network and gain credibility. Through the association, she worked with agents who took on the responsibility of booking the international cheese tours. She sells the tours at an average $6,000 per person, and the travel agent charges a 5 to 10% commission. Soon after she started working with an agent, a group of semi-retired food and travel enthusiasts booked her trip.

In addition, she has hired people to help with website development, marketing and media relations.

Each year, she also budgets for a renting booth at large industry conferences where her potential guests attend. Those efforts come with thousands of dollars of additional travel expenses, booth rental fees, hotel, food and registration costs, which have become necessary overhead, and she has to include them into the monthly budget. But she said they are absolutely worth it.

In Falcon’s case, she is a full-time contractor for a wedding service that operates in several locations around the country and specializes in digital marketing. Falcon works as the company’s New York liaison and photographer. The firm brings her a steady stream of clients, which frees her up from the marketing piece of the puzzle. By booking clients for her, Falcon said the company takes a substantial cut from each project payment. Falcon said she could potentially earn more if she worked for herself, but she admits that booking is hard work, and she is grateful that someone else is doing it for her.

If you are looking to seriously grow your freelance gig and want your name out there, you may want to educate yourself about social media and digital marketing. That said, don’t get hung up if you are uninterested in this sort of things or simply don’t have time for them. It may be worthwhile to hire a marketing professional who specializes in your industry.

Find a place to sell your hobbies

Whatever service you offer, it’s critical to find an avenue where you can commercialize your hobby. Booming e-commerce makes it easier than ever to do so. Third-party platforms can relieve you of the hard work of finding buyers, but the trade-off is that they take a commission of what you earn.

For artists and crafters, if the idea of creating a website and learning digital strategies freezes you, marketplaces such as Etsy, Amazon and eBay may be a good fit.

The downside is that those places take a cut from your listings and transactions. For instance, Etsy charges a $0.2 listing fee for each item and a 3.5% transaction fee on sales.

Although the marketing task is off your hands when you sell your items through a marketplace, you also face competition from thousands of other sellers. Compared with the full control you would have over design, marketing and SEO with your own website, you have less freedom on those fronts with a third-party platform. You will be subject to those companies’ policies and rules.

If you have in-demand services to offer — anything from writing and web design to bookkeeping and accounting — third-party platforms like Upwork, Freelancer, TaskRabbit will be of help. Again, you have to somehow offset the time and effort saved from finding clients. The three services charge a 3 to 30% service/project fee.

And don’t forget the oldie but goodie Craigslist, where Falcon snagged her current contractor job.

Figure out your rates

It may be a bit strange to tie money into the things that you love to do, but knowing your market value is extremely important if you hope to profit off your passion.

The hobby community you are in is a great resource for you to find out the average fees. If you don’t feel comfortable asking about rates, there are tools available online to help you figure out the value of your time.

A screenshot of website http://sparetime.arkivert.no/en

BeeWits, a project management software company, has released a freelance rates calculator. Similarly, this website by FINN.no, a Norwegian online marketplace for classified ads, helps users figure out how much their spare time is worth.

Writers and journalists may want to check out The Freelancer’s rates database, where freelancers can add what they’ve earned for certain projects for a variety of publishers.

Watch out for these common missteps

Assuming other people will enjoy your hobby as much as you do

“It’s easy to think, ‘Oh, I love yoga. Why wouldn’t everybody love yoga?” Warnick said.

Guess what? Others may not care for it. This is why you need to do your market research and figure out if there is demand for your passion.

Trying to do everything

Collamer said often when people try to do everything themselves, they end up spending too much time daunting over overwhelming tasks that they are uninterested in. But really, they should outsource labor when they are able to.

“The key of building any business is to know when you reached a level where you need to call in help to ensure that you don’t burn out and that you can manage all the aspects of what you do well,” Juhl said.>

Not thinking like an entrepreneur

Your hobby might be something that you really enjoy today, but once you decide to commercialize it, be prepared to tackle the not-so-exciting work.

You need to educate yourself about everything from the zoning regulations in your particular town, business registration, marketing, taxes and everything else that comes with running a business, Collamer said. “It’s not all going to happen automatically.”

Going all in at the beginning

Before establishing yourself as an entrepreneur, it may not be wise to you quit your job and jump into your business all at once because it may not be a good fit for you.

Running a business is a big commitment, both in terms of your time and finances. Juhl and Falcon both had other streams of income or savings to support themselves while they built their hobby-based businesses. Juhl’s cheese tours weren’t profitable for the first couple of years. Falcon said it took her a good five years to solidify herself as a photographer while working other jobs.

Don’t forget about taxes

Running your hobby business may come with lots of uncertainties, but taxes are certain.

Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, told MagnifyMoney that people who made money off hobbies used to be able to deduct related expenses within certain limits, yet under the new tax law, expenses related to a hobby won’t be deductible at all. Luscombe said this makes it logical for taxpayers to treat a hobby as a business.

Luscombe urges freelancers or contractors to keep separate records of all the income and expenses related to the business. If part of your home is dedicated for business purposes, for instance, a home office or a kitchen exclusive for producing items for sale, you need to allocate the square footage used. That is, dividing the space used for the business by the total square footage of the house, and that would be the percentage of expenses, such as insurance and utilities, that you can allocate and deduct from your taxes.

Under the new law, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning less than $157,500 ($315,000 for married couples) are eligible for the fullest deduction. So if you’re going to make money off your hobby, Luscombe said this new benefit is another reason to try treat it as a business.

If you are running a business on your own, you’re most likely seen as a sole proprietorship owner for tax purposes. You will have to report business-related income and losses on a Schedule C (Form 1040) each year, Luscombe said.

If you made more than $600 from any particular client, you should expect to receive a Form 1099-MISC. Likewise, if you paid anyone at least $600, you will have to issue the same form. For more information on how the new tax law affects small-business owners, check out our guide on the topic.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Shen Lu
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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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2019 Fed Meeting Predictions — No More Rate Hikes Until 2020

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The March Fed meeting put the kibosh on more rate hikes in 2019. With FOMC policy on pause, market interest rates should hold steady (or even decline in some cases) for financial products you use every day. Read on for our predictions for each upcoming Fed meeting and updates on what went down at the most recent conclaves.

What happened at the March Fed meeting

The Federal Reserve signaled no rate hikes this year, and the possibility of only one increase in 2020. The Fed has pivoted pretty rapidly from its hawkish stance in 2018 to a more dovish outlook as it puts policy on ice. This change in tone grows directly from the FOMC’s observation of slowing growth in economic activity, namely household spending and business investment. The Fed also noted that employment gains have plateaued along with the unemployment rate, which nevertheless remains at very low levels.

So the federal funds rate looks to remain at 2.25% to 2.50% for a year or more, and the FOMC highlighted that this is the not-too-hot, not-too-cold level that for now best serves its dual mandate to “foster maximum employment and price stability.”

The Fed also released its Summary of Economic Projections (SEP). The March SEP indicated a median projected federal funds rate of 2.6% for 2020, which is why everybody is discussing the possibility of at least one, small increase next year.

For those who were really hoping for at least one more rate hike, all is not lost — Tendayi Kapfidze, LendingTree chief economist, believes we shouldn’t take March’s decision too gravely. “There are special factors that suggest the economy could reaccelerate,” he says. “The government shutdown threw a wrench into things, slowing some activity and distorting how we measure the economy.” He also remarks that since the financial crisis, data in the first quarter has continued to come in weak, still leaving room for everything to reaccelerate in the second and third quarters. He points to the already strong labor market as a plus.

Fed economic forecasts hint at a possible rate cut by the end of 2019. Just as the Fed projects a slightly higher federal funds rate in 2020, it also posted a projected 2.4% for 2019. Note that this projected rate falls below the upper end of the current rate corridor of 2.5%. This means the doves may want to see a possible rate cut if improvements in the economic outlook don’t materialize by mid-year.

When asked about this potential rate cut, Fed Chair Jerome Powell emphasized the Committee’s current positive outlook, while also emphasizing that it remains mindful of potential risks. Still, he maintained that “the data are not currently sending a signal that we need to move in one direction or another.” He also remarked that since it’s still early in the year, they have limited and mixed data to consult.

Kapfidze offers a more concretely positive outlook, noting that the chances of a rate cut are pretty slim. “To get a rate cut, you’d have to have sustained growth below 2%. There would have to be further weakness in the economy, like if trade deals get messier, to warrant a rate cut.”

The Fed downgraded its economic outlook for 2019 for the second time in recent months. In line with Kapfidze’s predictions, we did see a weaker economic outlook coming out of this month’s Fed meeting. The median GDP forecast for 2019 and 2020 decreased from December projections, while it remained the same for 2021 and beyond. This comes hand in hand with the decreased fed funds rate projections.

The FOMC increased their unemployment projections, which Kapfidze found surprising because the labor market has been so strong. “Maybe they believe that those numbers indicate a deceleration,” he said, “but really, it has to be consistent considering the other changes that they made.”

Why the Fed March meeting is important for you

It’s easy to let all of this monetary policy talk go in one ear and out the other. But what the Fed does or doesn’t change has an impact on your daily life. Without a rate hike since December, we’re already starting to see mortgage rates fall. This is helpful not only for those who want to buy a home, but also for those who bought homes at last year’s highs to refinance.

As for personal loans and credit cards, we may still see these rates continue to increase, just at a slower rate. These rates have little chance of decreasing because lenders may take the current weaker economic data as a sign that the economy is going to be more risky.

Deposit accounts will feel the opposite effects as banks may start to cut savings account rates. At best, banks will keep their rates where they are for now, until more evidence for a rate cut arises.

Our March Fed meeting predictions

There’s little chance of a rate hike this time around. In a policy speech on March 8, Fed Chair Jerome Powell reinforced the FOMC’s patient approach when considering any changes to the current policy, indicating he saw “nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures.”

This is no different from what we heard back in January, when the Fed took a breather after its December rate hike. There was no change to the federal funds rate at that meeting, and Powell had stressed that the FOMC would be exercising patience throughout 2019, waiting for signs of risk from economic data before making any further policy changes.

Further strengthening the case for rates on hold, the reliably hawkish Boston Fed President Eric Rosengren cited several reasons that “justify a pause in the recent monetary tightening cycle,” in a policy speech on March 5. His big tell was citing the lack of immediate signs of strengthening inflation, which remains around the Fed’s target rate of 2%.

Even though there had been some speculation of a first quarter hike at the March Fed meeting, LendingTree chief economist Tendayi Kapfidze reminds us that the Fed remains, as ever, data-dependent. “The latest data has been on the weaker side, with the exception of wage inflation,” he says.

The economic forecast may be weaker than December’s. The Fed will release their longer-range economic predictions after the March meeting. These projections should include adjustments in the outlook for GDP, unemployment and inflation. The Fed will also provide its forecast for future federal funds rates.

Kapfidze expects we’ll see a weaker forecast this time around than what we saw in December. “I except the GDP forecast to go down, and the federal funds rate expectations to go down.” This follows a December report that posted lower numbers than the September projections.

Despite flagging economic projections, Rosengren offered a steady outlook in his speech. “My view is that the most likely outcome for 2019 is relatively healthy U.S. economic growth,” he said, again attributing this to “inflation very close to Fed policymakers’ 2 percent target and a U.S. labor market that continues to tighten somewhat.”

The Fed’s economic predictions offer clues to its future policy decisions. In September, the Fed projected a 2019 federal funds rate of 3.1%. That number dropped to 2.9% in the December report. With the current rate at 2.25% to 2.5%, there’s still room for more hikes this year. Keep in mind, however, that, the March meeting may narrow projections for the rest of 2019.

As for Kapfidze, he thinks we’ll see a rate hike in the second half of the year. “If wage inflation continues to increase and it trickles more into the economy, the Fed could choose to raise rates due to that risk.”

However, as of March 12, markets see the odds of a rate hike this year at zero, while the odds of a federal funds cut has risen to around 20%, based the Fed Fund futures.

Upcoming Fed meeting dates:

Here is the FOMC’s calendar of scheduled meetings for 2019. Each entry is tentative until confirmed at the meeting proceeding it. For past meetings, click on the dates below to catch up on our pre-game forecast and after-action report.

Our January Fed meeting predictions

Don’t expect a rate hike. The FOMC ended the year with yet another rate hike, raising the federal funds rate from 2.25 to 2.5%. It was the committee’s fourth increase of 2018, which began with a rate of just 1.5%.

But the January Fed meeting will likely be an increase-free one. Tendayi Kapfidze, chief economist at LendingTree, the parent company of MagnifyMoney, said the probability of a rate hike is “basically zero.”

Kapfidze’s assessment is twofold. First, he noted that the Fed typically announces rate increases during the third month of each quarter, not the first. This means a hike announcement would be much more likely during the FOMC’s March 19-20 meeting, rather than in January.

Perhaps more importantly, Kapfidze said there’s been too much market flux for the FOMC to make a new decision on the federal funds rate. He predicts the Fed will likely wait for more evidence before it considers another rate hike.

“I think a lot of it is a reaction to market volatility, and therefore that’s lowered the expectations for federal fund hikes,” Kapfidze said.

But if a rate hike is so unlikely, what should consumers expect from the January Fed meeting? Here are three things to keep an eye on.

#1 The frequency of rate hikes moving forward

It’s unclear when the next increase will occur, but the FOMC’s post-meeting statement could give a clearer picture of how often rate hikes might occur in the future.

The Fed released its latest economic projections last month, which predicted the federal funds rate would likely reach 2.9% by the end of 2019. This figure was a decline from its September 2018 projections, which placed that figure at 3.1%.

As a result, many analysts — Kapfidze included — are forecasting a slower year for rate hikes than in 2018. Kapfdize said some analysts are predicting zero increases, or even a rate decrease, but he believes that may be too conservative.

“I still think the underlying economic data supports at least two rate hikes, maybe even three,” Kapfidze said.

Kapfidze’s outlook falls more in line with the Fed’s current projections, as it would mean two rate hikes of 0.25% at some point this year. There could be more clarity after the January meeting, as the FOMC’s accompanying statement will help indicate whether the Fed’s monetary policy has changed since December.

#2 An economic forecast for 2019

The FOMC’s post-meeting statement always includes a brief assessment of the economy, and this month’s comments will provide a helpful first look at the outlook for 2019.

Consumers will have to wait until March for the Fed’s full projections — those are only updated after every other meeting — but the FOMC will follow its January gathering with its usual press release. This statement normally provides insight into the state of household spending, inflation, the unemployment rate and GDP growth, as well as a prediction of how quickly the economy will grow in the coming months.

At last month’s Fed meeting, the committee found that household spending was continuing to increase, unemployment was remaining low and overall inflation remained near 2%. Kapfidze expects January’s forecast to be fairly similar, as recent market fluctuations might make it difficult for the FOMC to predict any major changes.

Read more: What the Fed Rate Hike Means for Your Investments

“I wouldn’t expect any significant change in the tone compared to December,” Kapfidze said. “I think they’ll want to see a little more data come in, and a little more time pass.”

At the very least, the statement will let consumers know if the Fed is taking a patient approach to its analysis, a decision that may help indicate just how volatile the FOMC considers the economy to be.

#3 A response to the government shutdown

The big mystery entering January’s Fed meeting is the partial government shutdown. While Kapfidze said the FOMC’s outlook should be similar to December, he also warned that things could change quickly if Congress and President Trump can’t agree on a spending bill soon.

“The longer it goes on, and the more contentious it gets, the less confidence consumers have — the less confidence business have. And a lot of that could translate to increased financial market volatility,” Kapfidze said.

Kapfidze added that the longer the government stays closed, the more likely the FOMC is to react with a change in monetary policy. During the October 2013 shutdown, for example, the Fed’s Board of Governors released a statement encouraging banks and credit unions to allow consumers a chance at renegotiating debt payments, such as mortgages, student loans and credit cards.

“The agencies encourage financial institutions to consider prudent workout arrangements that increase the potential for creditworthy borrowers to meet their obligations,” the 2013 statement said.

What happened at the January Fed meeting:

No rate hike for now

In its first meeting of 2019, the Federal Open Market Committee announced it was keeping the federal fund rate at 2.25% to 2.5%, therefore not raising the rates, as widely predicted. This decision follows much speculation surrounding the economy after the Fed rate hike in December 2018, which was the fourth rate hike last year. In its press release, the FOMC cited the near-ideal inflation rate of 2%, strong job growth and low unemployment as reasons for leaving the rate unchanged.

In the post-meeting press conference, Federal Reserve Chairman Jerome Powell confirmed that the committee feels that its current policy is appropriate and will adopt a “wait-and-see approach” in regards to future policy changes.

Read more: How Fed Rate Hikes Change Borrowing and Savings Rates

Impact of government shutdown is yet to be seen

The FOMC’s official statement did not address the government shutdown in detail, although it was discussed briefly in the press conference that followed. Powell said he believes that any GDP lost due to the shutdown will be regained in the second quarter, providing there isn’t another shutdown. Any permanent effect would come from another shutdown, but he did not answer how a shutdown might change future policy.

What the January meeting bodes for the rest of the year

Don’t expect more rate hikes. As for what this decision might signal for the future, Powell maintains that the committee is “data dependent”. This data includes labor market conditions, inflation pressures and expectations and price stability. He stressed that they will remain patient while continuing to look at financial developments both abroad and at home. These factors will help determine when a rate adjustment would be appropriate, if at all. When asked whether a rate change would mean an increase or a decrease, he emphasized again the use of this data for clarification on any changes. Still, the Fed did predict in December that the federal funds rate could reach 2.9% by the end of this year, indicating a positive change rather than a negative one.

CD’s might start looking better. For conservative savers wondering whether or not it’s worth it to tie up funds in CDs and risk missing out on future rate hikes – long-term CDs are looking like a safer and safer bet, according to Ken Tumin, founder of DepositAccounts.com, another LendingTree-owned site. Post-Fed meeting, Tumin wrote in his outlook, “I can’t say for sure, but it’s beginning to look more likely that we have already passed the rate peak of this cycle. It may be time to start moving money into long-term CDs.”

Look out for March. Depending on who you ask, the FOMC’s inaction was to be expected. As Tendayi Kapfidze, LendingTree’s chief economist, noted [below], if there is going to be a rate increase this quarter, it will be announced in the FOMC’s March meeting. We will also have to wait for the March meeting to get the Fed’s full economic projections. For now, its statement confirms that household spending is still on an incline, inflation remains under control and unemployment is low. It also notes that growth of business fixed investment has slowed down from last year. As for inflation, market-based measures have decreased in recent months, but survey-based measures of longer-term inflation expectations haven’t changed much.

 

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Learn more: What is the Federal Open Market Committee?

The FOMC is one of two monetary policy-controlling bodies within the Federal Reserve. While the Fed’s Board of Governors oversees the discount rate and reserve requirements, the FOMC is responsible for open market operations, which are defined as the purchase and sale of securities by a central bank.

Most importantly, the committee controls the federal funds rate, which is the interest rate at which banks and credit unions can lend reserve balances to other banks and credit unions.

The committee has eight scheduled meetings each year, during which its members assess the current economic environment and make decisions about national monetary policy — including whether it will institute new rate hikes.

A look back at 2018

Before the FOMC gathers this January, it’s worth understanding what the Fed did in 2018, and how those decisions might affect future policy.

The year 2018 was the Fed’s most aggressive rate-raising year in a decade. The FOMC’s four rate hikes were the most since the 2008 Financial Crisis, after the funds rate stayed at nearly zero for seven years. This approach was largely based on the the FOMC’s economic projections, which found that from 2017 to 2018 GDP grew, unemployment declined and inflation its Fed-preferred rate of 2%.

In addition to the rate hikes, the FOMC also continued to implement its balance sheet normalization program, through which the Fed is aiming to reduce its securities holdings.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dillon Thompson
Dillon Thompson |

Dillon Thompson is a writer at MagnifyMoney. You can email Dillon here

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

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