America’s central bank, the Federal Reserve, meets next week to consider the next move for US interest rates.
The Fed meeting in June announced that the target range for the federal funds rate, the key US interest rate, had been raised, from 1.5%–1.75% to 1.75%–2%.
It justified this rise by pointing to the buoyancy of the economy, “the labour market has continued to strengthen and…economic activity has been rising at a solid rate”.
Rates start to “normalise”
As the economy has picked up speed, not least after the arrival of President Donald Trump in the White House in 2017, the justification of the emergency rates introduced during the depths of the financial crisis of 2008.
On 12 December that year, the target range was cut to one of 0%–0.25%, in effect the lowest possible range. At the same time, the Fed embarked on a “quantitative easing” (QE) programme, in which newly-created money was used to buy securities in the open market, thus pumping cash into the system to bolster economic confidence.
At its peak, the value of money created under QE totalled $4 trillion.
That was lifted again in March this year, to a range of 1.5%–1.75%, ahead of the June increase.
The Fed has two objectives in setting monetary policy. One is to keep so-called core inflation – a measure that excludes food and energy prices because of their volatility – at an annual rate of 2%. The other is to aim for “maximum employment”, which has never been officially defined but it is thought the Fed sees as an unemployment rate of about 4.5% of the workforce.