Fed Hikes US Interest Rates Again – With More To Follow

Lisa Smith, BA (Hons), CeFA
By

The US Federal Reserve has raised interest rates again.

The rate was hiked by 0.25% to 2% to 2.25% with the message that the markets and consumers should expect another rise before the end of the year.

The Fed has a tradition over recent years of putting the rate up in December.

The increase is the eight since 2015.

The Fed says the rate rise is to ‘foster maximum employment and price stability.’

The Fed also wants to keep the rate at around 2% over the medium term and does not consider any economic risks should hinder the plan.

Jobs market improves

“The labour market has continued to strengthen and that economic activity has been rising at a strong rate,” said a statement.

“Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2%. Indicators of longer-term inflation expectations are little changed, on balance.”

In Britain, the Bank of England has set interest rates at 0.75% – the highest levels since February 2009, when the rate last hit 1%.

The UK also has an inflation target of 2%, although the cost of living is currently running at 2.7% a year.

UK faces Brexit challenge

Former Bank of England rate setters Andrew Sentence and his colleague David Blanchflower have spoken out about how a no deal Brexit could impact the economy and interest rates.

Sentence points out that there is a disconnect between Brexit politics and economic data, but consumers and business are ignoring the politics. His view is a Brexit deal will be struck and how the economy is affected will depend on the terms.

Blanchflower is worried that rising oil prices will increase inflation and make the gap wider between wages and prices.

Both agree Brexit is the biggest threat to the UK economy, while worsening trade relationships between the US and China could also have a serious impact on the world economy as well as the UK.

Blanchflower feels increasing protectionism will only make Britain’s bid to negotiate trade agreements harder after Brexit.

Leave a Comment