US: The FED maintain interest rates and give praise to economic health

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US: The FED maintain interest rates and give praise to economic health

The Federal Open Market Committee (FOMC) gave an incredibly bullish assessment on the US economy during their meeting on Wednesday with its minutes reporting “the labour market has continued to strengthen” and “economic activity has been rising at a strong rate”.

As mentioned earlier, in the lead up to the meeting analysts had correctly predicted that interest rates would be maintained in the current range of 1.75% – 2.00%. This is in line with the committee’s commitment to increasing rates gradually to prevent policy shocks. i.e. a reassuring signal from the Fed that they will not raise rates too high or too quickly.

The bullish assessment is driven by strong data in relation to economic growth, employment and inflation illustrated in the chart below.

US Economic Performance: Economic Growth, Unemployment and Inflation

Source: Bloomberg, August 2018

Economic growth, as measured by GDP%, has jumped from 2.2% in Q2 to 4.1%, breaking through the 3.0% target. This has been stimulated by increased levels of business fixed investment i.e. infrastructure. It also reflects growing business confidence for the future and gratitude for Trump’s $1.5trn tax cut amid the on-going risk of trade wars. Consumers have also played an important role by increasing spending on non-durables such as food and clothing. Again, reflecting enhanced confidence and purchasing power.

Consumer confidence in the US economy is currently at a 17-year high, a commendable achievement for the Fed. Increasing confidence helps their efforts to enhance financial stability. This confidence is coupled with higher wage packages offered by firms looking to attract workers in a tight labour market. Unemployment is currently 4.0%, well below the government’s lower band target of 4.5%. Consumers who are willing and able to spend more boost the economy.

Inflation remains key to interest rate decisions at the FOMC. The central bank is aiming for price stability to avoid any potentially adverse impact on consumer purchasing power, savings and business international competitiveness. The latest figures show inflation, as measured by the Fed’s preferred measure ‘Personal Consumption Expenditure Index’ (PCE), below the 2% target. So far at least this vindicates their gradual approach to rolling back ultra-loose policy.

With the outcome expected markets were unchanged following the news. Fed Chairman Jerome Powell has generally been praised for his transparency and communication with markets since his appointment. The committee will reconvene for two days on the 25th September to vote on interest rates and analysts are suggesting there is a 90% chance a hike will occur taking rates to a range of 2.00 – 2.25%.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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