America’s central bank, the Federal Reserve, concludes a two-day meeting today of its Federal Open Market Committee, the body that sets interest rates.
Should the committee have voted for a rate rise, this would be yet another step towards restoring more usual levels of borrowing costs in the world’s largest economy.
A booming US economy has strengthened the case for winding down the extraordinary monetary measures put in place in December 2008 to prevent the financial crisis and Great Recession from turning into a full-blown slump.
Gradual return to normality
For many years, the target range for the Federal Funds Rate, the main federal interest rate, was zero to 0.25 per cent, and the Fed amassed a $4.5 trillion stock of US Treasury bills and mortgage-backed securities under a quantitative easing (QE) programme. These securities were bought using newly-created money, thus pumping cash into the economy at a critical time.
At the Fed meeting, in March, it voted for the latest in a series of rate rises, this one of 0.25 percentage points, taking the target range from 1.25 per cent to 1.5 per cent to a range of 1.5 per cent to 1.75 per cent.
In September last year, it announced that it would gradually sell the assets acquired under QE back into the market.
Even after last month’s rise, said the Fed, “the stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to two per cent inflation”.
The Fed has two objectives. Inflation at two per cent is one of them, and the other is “maximum employment”, which has never been defined but is thought to equate to an unemployment rate of about 4.5 per cent.
Inflation is currently above target, at 2.4 per cent in the year to March. The unemployment rate is 4.1 per cent on the most recent figures, which were released in April and refer to March.
Balancing the risks
The inflation figure may well be seen as indicating that, finally, prices are responding to the strong performance of the US economy. After its March meeting, the Fed said: “The Committee will carefully monitor actual and expected inflation developments.”
But the rate, it said, “is likely to remain, for some time, below the levels that are expected to prevail in the longer run.”
President Donald Trump’s appointment as chair of the Fed, Jerome Powell, took office in February. Speaking in April, he said: “It remains the case that raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardise the economic expansion.
“But raising rates too quickly would increase the risk that inflation would remain persistently below our two per cent objective. Our path of gradual rate increases is intended to balance these two risks.”