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.
Further increases likely
Core inflation was running at 2.3% in June, while the unemployment rate increased slightly during that month from 3.8% of the workforce to 4%. Even with this rise, the jobless rate is still well below the assumed Fed target, and inflation is above it.
In that context, it is unsurprising that interest rates rose twice in the first half of this year.
It added, “the committee expects that further gradual increases in the target range for the federal funds rate will be consistent with the sustained expansion of economic activity, strong labour market conditions and inflation near the committee’s symmetric 2% objective over the medium term.”
The day after the Federal Reserve meeting announces its decision, on 1 August, the Bank of England will make what is expected to be the first substantial rate-rise announcement since 2007. UK rates were, like those in the US, cut to an emergency level, in Britain’s case in March 2009 to 0.5%.
In the wake of the Brexit vote, they were cut again, to 0.25%, in August 2016, but this cut was reversed in November 17, leaving rates back at 0.5%.
Booming employment and rising inflation is thought likely to trigger a rise next week.