Dan AtkinsonAmerica’s central bank, the Federal Reserve, begins a two-day monetary policy meeting today amid expectations of another interest-rate rise.
Since December 2015, the target range for the key federal funds rate has been increased, in six gradual steps, from the “emergency” all-time low of 0% to 0.25%, in force since December 2008 to stave off a full-blown economic depression, to the current range of 1.5% to 1.75%, introduced after the Federal Reserve meeting of May this year.
This is in stark contrast to the picture in the UK, where the emergency level bank rate of 0.5%, introduced in March 2009, was actually cut further in August 2016 as a response to possible economic uncertainty following the referendum result two months earlier to leave the European Union.
US labour-market boom
In November 2017, this cut was reversed and the rate reverted to 0.5%, but that is the full extent of tightening by the Bank of England’s Monetary Policy Committee (MPC).
For its US equivalent, the Federal Open Market Committee, its two-day meeting opens with the key indicators that it is obliged to follow apparently urging a further rise in borrowing costs. The Fed’s twin mandate is for an annual rate of 2% in “core” inflation, which measures price rises, excluding food and energy costs, and for “maximum employment”, usually thought to mean an unemployment rate of about 4.5% of the workforce.
The Fed’s inflation target is “symmetrical”, meaning an undershoot is viewed as seriously as an overshoot. Food and energy prices are excluded as they are considered more volatile than most costs, with the core inflation rate believed to give a clearer picture of underlying inflationary trends.
However, as Fed governor Lael Brainard pointed out in a speech in New York last month, other indicators show a more mixed picture. “Real gross domestic product (GDP) increased 2.2% at an annual rate in the first quarter of 2018, a slowdown from the 3% pace in the final three quarters of 2017.”
Moderate expansion on the cards
“The first-quarter slowdown was especially noticeable in consumer spending, which increased at only a 1% pace last quarter compared with 2.75% in 2017.”
But on the brighter side, she added: “By contrast, business fixed investment increased 9% at an annual rate last quarter, surpassing its robust 2017 pace.”
After the Federal Reserve meeting in May, it said it expected the economy to “expand at a moderate pace in the medium term” and for labour-market conditions to remain strong. It added:
Looking forward, the Fed said: “In determining the timing and size of future adjustments to the target range [for interest rates], the Committee will assess realised and expected economic conditions.”
Jerome Powell, President Donald Trump’s nomination as Fed chair, took up his position in early February.