As expected, the U.S. Federal Reserve raised its benchmark interest rate by 25 basis points this afternoon. This is the sixth time it raised rates since it began tightening credit back in December 2015. The central bank boosted its key short-term rate to range between 1.5 per cent to 1.75 per cent.
The hike comes amid better than expected growth in the U.S. and record low unemployment rates. Despite the rate hikes, interest rates are still very low. Even after six rate increases over the past 27 months, the Fed’s benchmark rate still remains within a low range.
The Fed expects to keep shrinking its bond portfolio and signalled it will raise rates two more times in 2018.
In a statement released after the announcement, the Fed said, “The economic outlook has strengthened in recent months.”
It continued, “The committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and [labour] market conditions will remain strong.”
This is the first rate announcement from newly minted U.S. Federal Reserve Chairman Jerome Powell. Some economists believe he wants to start his tenure by showing he’s serious about keeping inflation under control, as inflation control should be the core job of any central bank.
In a note sent to journalists, Gus Faucher, chief economist with PNC Financial Services Group said, “More fed funds rate increases are coming in 2018, but the FOMC [Federal Open Market Committee] is split right now between two and three additional rate hikes.”
He added, “It depends on what happens to the economy through the rest of the year.”
All of this is out of step with the Bank of Canada, since it held rates at its last announcement and has been much slower to raise rates from their historic lows.
If the Fed sticks with its new forecast for a total of three rate increases this year and another three in 2019, the key policy rate would stand at 3.4 per cent after five years of credit tightening.
Also, forecasters are speculating if economic growth picks up and the job market remains healthy, the Fed headed by Powell is viewed as likely to accelerate its rate hikes to four this year. This will mean higher borrowing costs for Americans and a stronger American dollar.
As Canada does the majority of its trade with the U.S., consumers could find everyday items like groceries and household goods imported from the U.S. to go up in price. If Canada’s rates remain low, that could be further drag on our Canadian dollar, reducing our purchasing power of those more expensive goods from the U.S.