U.S. Fed Raises Benchmark Interest Rate; No Longer Seems to Be “Accommodative”

U.S. Federal Reserve

For the third time this year, the U.S. Federal Reserve raised its benchmark interest rate by a quarter point to a range between two and 2.25 per cent. This is also the eighth hike by the U.S. central bank since 2015. Rates are now the highest they have been in a decade, as the last time the U.S. saw rates this high was just after the Lehman Brother’s collapse in October 2008, and just before the global financial crisis.

Rates now closer to neutral

In its statement after the two-day meeting in Washington, the Fed reaffirmed its outlook on continuing to raise rates in 2019. Currently, the forecast is for three more rates hikes over the next year. It also removed a key word from its statement: “accommodative.” This was the only change in the statement from the previous one issued on August 1. The fact that the committee dropped this word is somewhat noteworthy; it sends a clear message that rates have moved closer to neutral. At neutral, rates are considered to be neither boosting nor restraining the economy. But in a press conference after the announcement, Fed Reserve Chairman Jerome Powell mentioned that this “doesn’t imply any change in the expected course of interest rates.”

Strong economic growth led to hike

The Fed cited strong economic growth job gains as part of the reason for raising rates at this time. They also pointed to inflation, that they say is now near the central bank’s two per cent target. The Fed backs this up in a statement released after the announcement, mentioning that “the labor market has continued to strengthen” and economic activity has been rising at a strong rate.

It adds, “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 percent.”

Trump asserts his dislike of rate hikes

The rate hike comes despite recent comments from U.S. President Donald Trump. In an interview with Reuters back in August, President Trump expressed his criticism of the Fed and its decision to raise rates.

“I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” Trump said. He went on to say the Fed should do more to help him boost the U.S. economy. And this wasn’t the first time he commented on his dislike of rate hikes; in July he also made similar remarks to CNBC.

Heightening trade wars complicating policy decisions

Although there was no mention of it in the Fed’s statement, President Trump has also complicated the Fed’s policy decision by escalating trade wars with several countries around the globe, including two of the country’s biggest trading partners – Canada and China. Recently, Trump announced tariffs on an additional $200 billion of imported goods from China, and this change took effect this week.

And while the economy has seen a boost in light of Trump’s tax cuts, there is speculation that there will soon be a slowdown. The cuts have helped economic growth over the last year, but growth is also expected to slump to 1.8 per cent by 2021. This is notably out of line with the Trump administration’s goal of three per cent growth.

Looking to the future of Canadian rates

North of the border, all eyes are on the Bank of Canada, with forecasters wondering if it will follow suit and raise rates in October. The Bank has hiked its benchmark rate four times since July 2017, however, this is nowhere near as aggressive at the U.S.

The U.S. trade wars and increased tariffs have continued to threaten our own positive economic growth. The Bank held rates at its last announcement, but the expectation is that it will raise rates in October. That will immediately make it more expensive for Canadians to borrow and could give the Canadian dollar a boost in value against the U.S. currency.

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Economic News / RSM News

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