The US Federal Reserve (Fed) raised its key interest rate by 0.25 percentage points at its December meeting. The Federal Open Market Committee (FOMC) has implemented a total three rate increases this year, taking the federal funds rate from a range of 0.5% to 0.75% to a range of 1.25% to 1.5%.
- Policymakers voted for the increase by seven votes to two
- Inflation remains subdued
- Three further rate increases are expected in 2018
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The US Federal Reserve (Fed) raised its key interest rate by 0.25 percentage points at its December meeting. The Federal Open Market Committee (FOMC) has implemented a total three rate increases this year, taking the federal funds rate from a range of 0.5% to 0.75% to a range of 1.25% to 1.5%. Although the decision was widely anticipated, it was not, however, unanimous: two of the nine members of the FOMC voted against the rate increase.
“Further interest-rate increases are likely to be “gradual”, reflecting the subdued inflationary backdrop”
Policymakers still anticipate three further rate increases in 2018 against an economic backdrop that has continued to strengthen. According to Fed forecasts, the federal funds rate is predicted to reach 2.1% in 2018 and 2.7% in 2019, rising to 3.1% in 2020. The US economy grew at an annualised rate of 3.3% during the third quarter; meanwhile, the country’s rate of unemployment declined to 4.1% in November, reaching its lowest level since December 2009, and is expected to continue to decline to 3.9% in 2018.
Fed Chair Janet Yellen said she felt “good” about the outlook for the US economy, commenting, “There’s less to lose sleep about now than has been true for quite some time”. Although stock markets have continued to hit new highs this year, Chair Yellen, while acknowledging that asset valuations are “elevated”, said, “When we look at other indicators of financial stability risks, there’s nothing flashing red there, or possibly even orange”.
Although the Fed appears to be relatively sanguine about the outlook – the central bank upgraded its forecast for US economic growth in 2018 from 2.1% to 2.5% - policymakers still believe further interest-rate increases are likely to be “gradual”, reflecting the subdued inflationary backdrop. Looking further ahead, however, the economy is predicted to grow by 2.1% in 2019 and 1.8% in the longer term, which is considerably lower than President Donald Trump’s goal of 4% growth. President Trump’s controversial package of tax reforms – currently working their way through Congress – are expected to deliver a “modest lift” to the economy in the short-term. Nevertheless, Chair Yellen said that the tax cuts were unlikely to deliver a “gigantic increase” in economic growth. Chair Yellen is being replaced when her first term ends early in 2018. Her successor – favoured by President Trump – will be Jerome Powell, a current member of the Fed’s Board of Governors.
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