Fed raises rates, monetary policy on course for normal?
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Fed raises rates, monetary policy on course for normal?

As was widely expected, the Federal Reserve (FED) decided to raise interest rates on Wednesday for the second time in three months. The decision was spurred on by steady economic growth, signs that inflation is rising to meet the central bank’s target, and a strong jobs report from the previous week. Coming so soon after its previous hike, this is a strong indicator that the FED is aiming for a more normal monetary policy stance in the near future.

Despite the general optimism that led to the rates rise, the FED has not committed to tightening monetary policy, and said that further hikes would be “gradual”. At present, that looks like it means two more hikes this year, and three in 2018. For comparison’s sake, they only managed one hike in 2016.

The FED was reserved in its economic forecast, which was little changed from December. This indicates that the central bank is as uncertain as the rest of us on exactly what the specifics of President Trump’s policies will be, and how they will affect that economy. In a statement, it maintained its previous stance:

“With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.”

For 2017, the FED expects the economy to grow by 2.1%. It also expects the unemployment rate to remain at its favourable 4.5% from last month. However, it now expects inflation of 1.9% for the year, against a figure of 1.8% in December’s forecast.

The rate hike accompanies a broad improvement in the world economic outlook, and, according to the FED’s policy statement, risks remain “roughly balanced”.

The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.

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