After effecting a rate hike in June, the Federal Open Market Committee (FOMC) of the Federal Reserve maintained rates between 1.75 percent and 2 percent at its Aug. 1 meeting.
“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation,” the release read.
As experts had predicted, the FOMC reiterated an intent to pursue additional increases amid roughly balanced risks.
Why It’s Important
The Fed’s balance sheet decisions also influence Treasury strategy, which today included an increase in note auctions. It also affects economic expansion.
Generally, the Fed raises rates in response to explosive economic growth. Increases curb inflation, preserve the value of the dollar, stabilize prices, and depress borrowing, consumer spending, business profits and stock market performance.
In the last earnings period, the U.S. recorded its strongest GDP growth since 2014, with the annual rate accelerating 1.9 percentage points. Soybean shipments led a 9.3-percent increase in exports, consumer spending spiked 4 percent, consumer prices popped at a 1.8-percent annual rate and federal spending rose 3.5 percent.
Under these circumstances, and with a strong labor market and low unemployment, Fed Chairman Jerome Powell targeted 2-percent inflation last month and indicated an intent to continue tightening rates through the year.
But conditions supporting GDP growth — aggressive federal spending, temporary tax reform benefits and an export boom driven by tariff scares — are expected to dissipate in coming quarters, and growth is forecasted to stall as trade policies weigh on cross-border sales and international supply chains.
“There were no mentions of tariffs or trade disputes in the Fed statement, and they gauge the risks to the economy as balanced – which speaks to the strength of the economy and need to raise rates a couple more times before the year is out,” said Greg McBride, Bankrate.com’s chief financial analyst.
The FOMC might also face pressure from the Trump Administration to keep rates low. Before Wednesday’s decision, President Donald Trump had criticized the Fed for risking economic growth and putting the U.S. at a global “disadvantage” with rising rates. “I am not happy about it,” Trump told CNBC last month.
….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?
— Donald J. Trump (@realDonaldTrump) July 20, 2018
For now, though, the Fed expects to continue raising rates.
“The Committee expects 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 percent objective over the medium term,” the release read.
Joe Brusuelas, chief economist at RSM, anticipates a 25-basis-point increase in the federal funds rate in September to bring the range between 2 percent and 2.25 percent. Accelerated economic growth and a drop in unemployment to 3.7 percent are expected to precede another hike in December that would bring the rate between 2.5 percent and 2.75 percent.
“This implies that the spread on the U.S. yield curve will modestly flatten below the weekly average of 30 basis points through the end of the year, setting up a series of monumental 2019 decisions out of the Federal Reserve,” Brusuelas said in a report, predicting major policy action between March and June 2019.
If the rate pushes beyond 3.25 percent against a negative yield curve, he expects the Fed to delay its strategy.