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US interest rates reach a ten-year high

The US Federal Reserve raised its key federal funds rate by 0.25 percentage points to a range of 2% to 2.25% at its September monetary policy meeting. The unanimous decision represented the third increase this year, and the eighth since 2015. The Fed also removed the longstanding description of its monetary policy as “accommodative” from its statement.

  • The federal funds rate reached its highest level since March 2008
  • The Fed raised its forecast for GDP growth in 2018 from 2.8% to 3.1%
  • US businesses are voicing concern over the impact of the trade war between the US and China 

The US Federal Reserve (Fed) raised its key federal funds rate by 0.25 percentage points to a range of 2% to 2.25% at its September monetary policy meeting. The unanimous decision – taken by the members of the Federal Open Market Committee (FOMC) – represented the third increase this year, and the eighth increase since 2015, and Fed Chair Jay Powell described this trend as a “gradual return to normal”. The last time the federal funds rate reached 2.25% was in March 2008.

“A gradual return to normal”

Another increase is widely expected in December; looking further ahead, the FOMC believes that “further gradual increases in the target rate for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term.” A sustained increase in borrowing costs, however, is likely to stoke concern about the longer-term impact on economic growth.

Chair Powell highlighted the fact that, having removed its economic stimulus measures, the Fed had removed the longstanding description of its monetary policy as “accommodative” from its statement. He stressed that the change did not signal any change to prospective policy; rather, it is intended to indicate that policy is proceeding in line with policymakers’ expectations.

He also sounded a note of caution about the possible impact of the ongoing trade war between the US and China, citing “a rising chorus of concerns” from US businesses. Although he does not believe that the current tit-for-tat imposition of tariffs is likely to have a significantly negative effect on economic growth at present, he warned that a long-term swing to a “more protectionist world” was likely to undermine economic growth in the US and the rest of the world.

The central bank remained relatively sanguine about the economic outlook: the labour market remains relatively robust, and the rate of unemployment in the US stood at 3.9% in August; meanwhile, spending and business fixed investment have grown strongly. The Fed raised its forecast for US economic growth from 2.8% to 3.1% in 2018, from 2.4% to 2.5% in 2019, and maintained its forecast for 2020 at 2%. Inflation is expected to remain around the 2.1% level until 2021. The rate of unemployment is predicted to continue its decline, falling to 3.5% in 2019 and 2020.

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