• HDFC
• 07 Aug 2018
• Knowledge Centre

HDFC, Tester

The Federal Reserve kept interest rates unchanged in its last policy meet on 1st August 2018. The benchmark overnight lending rate was also the same, in a range of 1.75% to 2%. The vote to keep rates unchanged was unanimous.

 

The Fed committee noted that its policy stance remains “accommodative”. It also said that inflation continues to progress near the Fed's 2% goal. This follows the last hike of the benchmark federal fund’s rate to a range between 1.75% and 2% in June 2018.

 

Some Triggers

 

US’ economic growth (GDP) came it at 4.1% in the second quarter. This figure was the best witnessed by the US economy in nearly four years. Government data revealed that triggers for this included boosted consumer spending and export of food grains and crops to China by the country’s rural segment. This was executed swiftly to avoid reciprocal trade tariffs being imposed by China.

 

Inflation is also rising after six consistent years of coming in below the Fed’s target. The Personal Consumption Expenditures or PCE price index increased at a pace of 2% in the second quarter. In addition to this, lower unemployment is reflected in US Government data, which reveals that labor costs witnessed their greatest annual gain since 2008 in the second quarter.

 

The job market is expected to continue to strengthen. According to the Fed statement, “Job gains have been strong, on an average in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly.” This is also reflected in the July 2018 jobs report released on 3rd August 2018.

 

Economic growth has been buoyed by the fiscal stimulus from the Trump administration’s tax cuts and spending.

 

US President’s opposition

 

In an interview with CNBC-18, US President Donald Trump came out openly and criticized the stance taken by the Fed.

 

“I’m not thrilled. Because we go up, and every time you go up they want to raise rates again. I don't really — I am not happy about it. But at the same time I’m letting them do what they feel is best. But I don’t like all of this work that goes into doing what we’re doing.”

 

In order to sustain growth in the economy, the Fed plans to increase interest rates twice by the end of the year. It said that, “Further gradual increases in the target range for the Federal funds rate will be consistent, with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term.”

 

While the Fed kept interest rates on hold, it said the US economy was strong, indicating that it is on track to deliver expected rate hikes in September 2018 and December 2018.

 

“The central bank faces the task to increase interest raise rates and bring inflation back to historical norms. However, it has to ensure that interest rate hikes do not steer the economy into a recession,” says Mr. Deepak Jasani, Head Retail Research at HDFC securities Ltd.

 

As per a Bloomberg News report, if the recent tax cuts stimulate faster-than-expected growth, the Fed might have to tighten interest rates at a faster pace.
The Fed is widely expected to raise rates in its September 2018 meeting, and then again in December 2018. Traders in the Fed funds futures market are indicating a 91.4% chance of a September 2018 increase, and a 68.2% probability for another move in December 2018.