As we predicted yesterday, the US Federal Reserve has approved its third quarter point rise in interest rates for 2017, taking the US interest rate band up to 1.25 to 1.5%. The principal aim of the policy is to normalise interest rate policy following on from the years of ultra-low interest rates as a consequence of the Global Financial Crisis. To indicate just how low rates have been, it is instructive to look at the long-term figure for US interest rates which comes in at 5.75% for the period from 1971 to date (range: 0.25%, December 2008 to 20%, March 1980). The idea behind the move is to “re-arm” interest rate policy as a tool to deal with inflationary pressure (by raising interest rates) or recessionary pressure in the economy (by dropping interest rates). When rates are as low as they have been, interest rate policy is an ineffective leaver and extraordinary measures such as quantitative easing need to be deployed.
The Fed is predicting that interest rates will continue to tighten in 2018 with three (probably 0.25%) hikes likely across the year.
The Fed increased their forecast projections for US growth in the wake of the business-friendly tax reforms that the Trump administration has succeeded in passing. The Fed now expects growth for 2018 to come in at 2.5%, upgrading a 2.1% forecast made in September. It is expecting inflation to continue to be below the target of 2% and suggested that “one-off” factors such as a reduction in the costs of mobile phone plans had held it back. It thinks that the tax reforms could lead to a boost in business investment and consumer spending. The exact details of the tax reforms have yet to emerge from the political wrangling process, of course.
The chairman of the Federal Reserve, Janet Yellen, is due to step down in February 2018, but it is thought that her successor is likely to adopt the same cautious policies that marked her tenure.