Federal Reserve Adopts Dovish Stance
The Federal Reserve has indicated that it is unlikely to increase interest rates this year and foresees only a single rise in 2020. The move will no doubt please President Trump who has been critical of the Fed’s policy of slowly normalising interest rates towards more typical values. Originally, the Federal Reserve had anticipated that interest rates would rise twice this year, almost certainly in 0.25% increments.
The Fed noted: “the growth of economic activity has slowed from its solid rate in the fourth quarter. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter". The decision of the Fed was unanimous and it keeps rates on hold in the range from 2.25 to 2.5% (which is markedly higher than the Bank of Japan, European Central Bank and the Bank of England, to name just a few).
Whilst claiming that there was a positive outlook for the US economy across 2019 with unemployment under 4% and inflation below target of 2%, the Federal Reserve Chairman, Jerome Powell suggested that Fed would adopt a patient approach: : "It may be some time before the outlook for jobs and inflation calls clearly for a change in policy".
Powell noted that the continuing trade dispute with China, a slowing global economy and economic risks associated with the Brexit process were all risk factors to the US economy. The Fed takes the view that the US economy can sustain growth of 2% which is a more Dovish figure than the 3% GDP expansion than the President is targeting.
The historic average interest rate in the USA is 5.69% (1971 to 2019) with a minimum value of 0.25% (December 2008) and a record level of 20% in March 1980. Interest rate policy is a tool that the Fed uses to curb inflationary pressure in the economy or to boost or retard economic activity.