What’s Been Happening?
The Federal Reserve hiked up US interest rates by 25 basis points for the first time in March, its third upward move since the 2008 financial crisis. At the time, Janet Yellen who is the chair of the Board of Governors of the Federal Reserve System, expected rates to be increased twice more this year. Some economists are sceptical of this however, including global economist Anna Stupnytska from Fidelity International. She said that their base case is only for one more hike to occur this year, as a cyclical peak is being reached soon and the likelihood of a China slowdown weighing on “global inflation, markets and growth is fairly high”.
At the latest Federal Reserve meeting on Wednesday, it seems Janet and policymakers were ‘feeling good’ about the economy and have forged ahead with an interest rate increase despite growing concerns of weak inflation. The target range for the federal funds rate is now between 1% – 1.25%.
A statement issued by the Federal Reserve indicated that “On a 12-month basis, inflation has declined recently and is expected to remain somewhat below 2 percent in the near term but to stabilise around the committee’s 2 percent objective over the medium term.”
One of the barometers that the Fed monitors is unemployment which dropped to a 16-year low at 4.3 percent in May. This may have given them the confidence to keep gradually lifting the low borrowing rates towards their historic norms.
Whilst the Federal Reserve maintains an accommodative stance on monetary policy, Yellen has said that it will be appropriate to move to a more neutral stance if they continue to move along the path [of interest rate rises].
The journey is not over as the long-run interest rate is 3% which is the median estimate made by policymakers. According to 30-Day Fed Fund future prices, the probability of another rate hike later on in the year is currently at 2.5% for the July Federal Reserve meeting although this markedly increases to a probability of 30% by December. The timing of the interest rate increase would of course depend on the state of the US economy and its continued growth.
The bottom line for American consumers is that there will be an increase in their borrowing costs which may strain some households.