Fed Signals A Pause To Rate Hikes
In a move that will no doubt delight President Trump, the US Federal Reserve has indicated that it is calling a halt (for now at least) to its plans to normalise US interest rates towards their pre-Global Financial Crisis average value.
Currently, the US interest rate lies in a band between 2.25 and 2.5%. This is significantly higher than most other major central bank rate: Japan -0.1%, Switzerland -0.75%, European Central Bank 0%, Bank of England 0.75%, Australian Reserve Bank 1.5%, Bank of Canada 1.75% and Central Bank of the Russian Federation 7.75%.
To nobody’s particular surprise, the Fed held rates unchanged at its January meeting. However, the announcement that the planned rises across 2019 may be fewer than expected (or not at all) will have taken some by surprise. In a statement after the meeting, the Federal Reserve Chairman, Jerome Powell, noted that developments in recent month (slowing global economy, Brexit uncertainty, trade tensions with China and the recent partial government shutdown in the US) warranted a more cautious fiscal approach:
"We see these uncertainties, we can afford to wait. The length of this patient period is going to depend entirely on incoming data and its implications for the outlook”.
The news that interest rates would be on hold for a while gave a fillip to American stock markets. The S&P 500 put on 1.56%, the Nasdaq saw a gain of 2.2% and the Dow Jones Industrial Average finished trading up by 1.75%. The Dollar, unsurprisingly, fell back against other marginal currencies on the announcements that rates would be held.
In historical terms, US interest rates are still very low. The long- term average figure is 5.69% (1971 to date), well above the current upper bound figure of 2.5%. Inflation in the US currently stands at 1.9%, its lowest level since August 2017.