The Strategist

Fed is getting ready for yet another rate hike

08/02/2018 - 15:45

As expected, the Federal Reserve System (Fed) of the United States kept the key rate at 1.75-2% per annum on Wednesday. At the same time, the US regulator optimistically assessed the state of the economy in the country, noting that inflation is close to the target of 2%. Against the background of positive macro statistics, experts predict two more rate hikes in the remaining three meetings of the regulator this year, the first of which will take place in September.

Tim Evanson via flickr
Tim Evanson via flickr
The US Federal Open Market Committee left the key rate at the level of 1.75-2% per annum at the end of the regular meeting. Since January this year, the rate has been raised twice, both times by 0.25 percentage points (in March and June). In total, since December 2015, when the cycle of tightening monetary policy began, the rate was raised seven times, including three times in 2017 (by a total of 0.75 percentage points). Last September, the regulator also announced beginning of clearing its balance sheet, which accumulated assets at $ 4.4 trillion as a result of quantitative easing programs (now the regulator sells securities for up to $ 20 billion a month).

In a statement, the Fed noted the "strong pace" of improving the state of the US economy, separately indicating the growth in the number of jobs, consumer activity and investment. The committee also pointed out that inflation (including without food and energy) remains close to a 2% target. At the same time, the regulator retained the wording that "a further gradual increase in rates will reflect the improvement in the economy." It is also indicated that "the risks are generally balanced".

Recall, according to the point schedule, which notes the forecasts of the committee members, this year the rate can be increased four times, in 2019 - three more times, to 3-3.25%.

Toughening monetary policy contributes to improvement of the US macro statistics. For example, in the second quarter, GDP growth in annual terms was 4.1%, the highest since 2014 (2.2% in the first quarter of 2018 by the first quarter of 2017). The growth was provided by a higher than expected increase in consumption (plus 4% versus 0.5% in January-March), while capital investments grew by 7.3% (11.5% in the first quarter), exports - by 9,3% (the indicator was supported by the increase in supply against the background of the expected increase in duties). At the same time, inflation in consumer spending, excluding food and fuel, remained at 1.9% in June (as in April-May); taking into account all goods, the indicator was 2.2%. The unemployment rate in June rose to 4% (against 3.8% in May), but remains low even by the Fed’s standards. Recall that in June the regulator improved inflation forecasts for 2018 (increased from 1.9% to 2%), unemployment (from 3.8% to 3.6%), as well as GDP growth - from 2.7 % to 2.8%.

Capital Economics expect that the rate will be raised twice in the remaining months of the year; the same is expected from the first half of 2019. At the same, the analysts indicate possible weakening of business activity in the industry due to the strengthening of the dollar.