For the second time in three months, the United States Federal Reserve has raised its target interest rate by 0.25 percent, now up to 0.75 per cent. The move reflects that the U.S. economy is improving. It also means further hikes this year by the U.S. Fed will likely be gradual.
In a statement issued after the announcement, the central bank indicated that it is closer to its targets for employment and inflation due to the strengthening job market and general rising prices. In the U.S., steady hiring has brought the unemployment rate down to 4.7 per cent and inflation has moved closer to the central bank’s preferred target of 2 per cent.
Still, the Gross Domestic Product (GDP) – the broadest gauge of the U.S. economy’s health – remains well below what’s considered healthy economic levels. But many analysts say they’re optimistic that U.S. President Trump’s proposed tax cuts, infrastructure spending increases and deregulation may accelerate growth.
The U.S. Fed’s move reveals that after eight years, the Great Recession, which began with the U.S. housing collapse, may be over. Now, ultra-low rates no longer need to be supported.
After the 2008 financial crisis, the Fed had cut rates to record lows – nearly zero. And they remained there for years until the first hike in December 2015. This was all in an effort to stimulate the economy and encourage borrowing.
But the Fed’s overall view of the U.S. economy has changed slightly. Officials are now expecting economic growth of 2.1 per cent this year and next year before slipping to 1.9 per cent in 2019.
The Fed’s move is in contrast to the Bank of Canada’s latest announcement. On March 1st, the BoC said it was holding its overnight interest rate at 0.5 per cent. The decision to keep rates low was attributed to the Canadian economy facing “persistent economic slack” and “significant uncertainties.”
How does this affect us?
How this will affect Canada is unclear as this is unchartered territory. The Bank of Canada usually moves in tandem with the Fed when it comes to rate hikes and rate cuts. Also, since the U.S. is our biggest trading partner, it is hard to tell how this could impact business activity in Canada.
While this will mean higher rates for some consumer and business loans in the U.S, this is not the case in Canada.
In immediate reaction to the news, North American stock markets surged.