Federal Reserve Increases Interest Rate - 21 December 2018
In a move that will have surprised nobody, but no doubt annoyed President Trump, the Federal Reserve increased its key interest rate by a further 0.25%, The range for the interest rate now lies in a band from 2.25 to 2.5% as the Fed continues with its policy of gradually increasing interest rates towards long-term average values.
The US President had let it be known (by “Tweet”, of course) that he was against increasing the borrowing costs to US businesses and consumers. The Fed has become a popular whipping boy for the President who has blamed it for recent turbulence in the market. Others point to his policy of using tariffs as leverage in a trade war with China and global fears (partly due to this) of a slow-down in the global economy as the real reason.
Whilst the chairman of the Federal Reserve is nominated by the President (Trump replaced Janet Yellen, an Obama nominee, with Jerome Powell), the institute is supposed to be independent from political pressure.
The long-term average figure for US interest rates stands at 5.69%, so the current figure of 2.5 is very low by this measure (low 0.25% Dec 2008; high 20% March 1980, data range from 1971 to date).
The Dollar ought to have gained ground on the news of the hike (since investors get a better, safe rate by holding Dollars), but it fell against other majors. This decline has been blamed on fears that the US economy may be cooling and that “dearer” money may dampen investment. The cost of borrowing money is relative, but most observers would still say that money was “cheap”.
The Federal Reserve has indicated that the monetary tightening is set to continue in the New Year, but has suggested that there are likely to be fewer rate increases next year than the four (0.25%) hikes seen this year.