After a two day meeting, the U.S. Federal Reserve announced last Wednesday that it unanimously voted to keep its benchmark federal funds rate in a range from 1.75 per cent to two per cent.
This comes despite the U.S. Fed admitting that the market has continued to strengthen, economic activity has been rising at a strong rate, job gains have been strong and the unemployment rate has stayed low. In addition, household spending has reportedly increased, along with business investment and inflation.
In a statement released after the announcement, the Federal Open Markets Committee (FOMC) says, “In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1.75 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
In response, BMO Deputy Chief Economist Michael Gregory says the most important word in this statement is the use of the word “strong.”
In a note sent to journalists, Gregory says, “the Fed finally took the plunge and referred to overall economic activity as rising at a “strong’ rate. In the previous meeting, when the FOMC hiked policy rates, it was said to be rising at a ‘solid’ rate. Of course, the shift from ‘solid’ to ‘strong’ was made easier with a 4.1% print for annualized real GDP growth in Q2. Unless this plethora of strong-tinged adjectives and adverbs somehow weakens during the next eight weeks, we judge that this language is setting the stage for rate hike on September 26th — with due deference to all that could go wrong in the interim, ranging from the economic to the geopolitical.”
Future of the benchmark rate
Market forecasters say there is a 90 per cent chance the U.S. Fed will raise rates in September, and a 70 per cent chance it will raise rates again in December.
As the U.S. moves towards higher rates, this could put more pressure on Canada to do the same. Since last summer, the Bank of Canada has increased its overnight rate four times, as the rate currently sits at 1.5 per cent. Like the U.S. Federal Reserve, inflation remains the Bank’s biggest concern, and keeping the rate at or near two per cent is their mandate.
The Federal Reserve did not mention U.S. President Donald Trump, but President Trump did tell CNBC in a July interview that he was “not happy” about rising interest rates, which tend to put a damper on economic growth. There was no indication if Trump’s comments affected the Fed’s decision this week.
The next announcement will be on Sept. 26, 2018.