As expected, the US Federal Reserve reacted to the current robust US economy by raising the key interest rate for the third time this year on Wednesday. The target for the Fed Funds Rate was raised by 0.25 percentage points to a range of 2.0 to 2.25 per cent. A further increase towards the end of the year is likely, going by the central bankers’ outlook for the interest rate. Three further hikes are currently planned for 2019.
While the financial markets pretty much regarded the interest rate hike as a done deal, the accompanying comments on the Fed’s further steps were awaited with anticipation. Fed’s monetary policy strives to achieve maximum employment as well as price stability. Therefore, the central bankers’ assessments regarding inflation and the labour market are considered important indicators for future interest rate policy.
Robust economy, but trade conflict is a potential risk
The Fed now confirmed its assessment of the economic situation. It noted that the labour market continues its consolidation, while economic activity grows at a rapid pace. Consumer spending and corporate investment have increased, while inflation remains close to the Fed’s two-per-cent target. However, a possible risk the currency guardians see is the global trade conflict. US President Donald Trump’s protectionist economic policy is also fueling this risk.
An increasing number of companies is worried about the dangers of rising costs and growing uncertainties, said Fed Chairman Jerome Powell. Fears include supply chain disruptions, loss of market access and a general decline in investment willingness.
Meanwhile, U.S. President Donald Trump fears that the Fed’s interest rate hikes will have a negative impact. rising interest rates make loans more expensive for businesses and consumers. After repeatedly criticising the Fed’s monetary policy in the past, he also took issue with the Fed’s latest interest rate decision.
Eighth increase since 2015 interest rate turnaround
The Fed has now raised its key interest rates for the eighth time since the start of the interest rate turnaround in late 2015. The interest rate hikes were accompanied by increasing stock market prices, with the Dow Jones stock index, among others, climbing to new all-time highs in September.
Interest rates and stock prices are thus continuing to recover from the aftermath of the 2008 financial crisis. At the time, the US Federal Reserve had tried to slow the economic downturn by slashing interest rates, keeping the key interest rate at the then-all-time low of 0 to 0.25 per cent between the end of 2008 and 2015.
Forecasts are not a reliable indicator for future developments.