By Amram Margalit – Leverate

What US rate rises say about its growth?

Last month, the US Federal reserve raised interest rates for the eighth time since late 2015. The Fed has “penciled-in” a further rate rise in December, when the Fed next meets. Current projections are that the Federal benchmark will hit 3.4% by 2020, with three rises expected over 2019.

The September minutes from the Fed meeting showed that the majority of Fed reserve officials believe that rate increases are needed to “slow down the economy”, with some conjecture as to how long a restrictive policy should be instituted. It seems that the Fed believe that some delicacy is needed to balancing the economy; tightening too quickly, will cause the economy to weaken, yet too slowly, will prompt inflationary pressures.

The decision by the Fed was in relation to current firming in inflationary pressures, which Federal officials believe will “modestly” exceed the 2% annual target. In addition, the sentence describing the current conditions and monetary policy as “accommodative” was removed. Fed officials were quick to clarify the meaning behind this decision, with Jay Powell, Fed Chairman, indicating that the change in language “does not mean that the policy is not accommodative”, with other officials noting that the language was simply outdated and should be removed prior to rates approaching a neutral stance.

Despite the decision on the language of the Federal reserve, it is clear that the position taken by the Fed is one that is intended to create a slowdown due to increased inflationary pressures. The early increases in interest rates in 2015 were needed to normalize the levels after the years of zero interest rates in the wake of the Great Depression of 2008, where the rate increases were in fact designed to be “accommodative”.

The recent inflationary pressures that the Fed cited are largely due to recent political factors. Over the last year, the Trump administration has provided support for taxation cuts, which has stimulated economic growth in the US. At this stage of the economic recovery post QE, the further need for interest rate rises shows the prospects of dangerous overheating.

As it stands, the US economy is in the process of an unusually long bull run since the conclusion of the Great Depression. This is despite the instability caused by the Trump administration’s war on tariffs that appear to be throwing world markets into turmoil. Or perhaps, as the intended beneficiaries of these tariff wars, the US economy is looking towards a brighter future. Certainly, the impact of steel and aluminum tariffs on Chinese imports has yet to be felt in the US economy.

Indeed, the Fed is bullish over the long term, despite the “uncertainty regarding trade policy”. Markets appear to be less certain and having priced in interest rate increases, appear to be continuing the bull market while keeping a close eye on wages, inflation, imports and commodities. But volatility is high and the bond market, while increasing, does not yet seem to show that it believes in the US’s strength for economic recovery.

The Fed is watching closely to see what impact its rises will have on a strong economy. The markets are also waiting and watching to see how this will impact the continued recovery of the US economy. For now, all appears to be well, and the US economy continues to grow in strength.

About the Author:

Amram Margalit is a professional writer who has worked in a wide range of settings, including technology companies, nonprofits, and the entertainment industry. Within these positions, Amram has provided quality content and advertising services and is currently the Content Manager at Leverate.