Interest Rate in USA

USA - Interest Rate

Federal Reserve holds steady on rates, remains on track for a September hike

At its 31 July–1 August monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously decided to maintain its target range for the federal funds rate at between 1.75% and 2.00%. This move was overwhelmingly expected by market participants, as the FOMC had already raised rates at its previous meeting in June. Furthermore, the Fed usually announces significant policy changes only during FOMC meetings which are followed by a press conference—which the August meeting did not have scheduled, cementing expectations of a steady course for interest rates.

All told, the August FOMC meeting was rather uneventful, with the post-meeting Fed communiqué being only marginally altered compared to the one issued in June, to reflect the positive economic data recorded in recent months. Specifically, the FOMC now recognized that household spending—which was seen as “picking up” in the June statement— had grown “strongly” in past months, notably reflecting robust retail sales data in Q2. On the inflation front, the Fed statement was also updated to reflect a pick-up in both headline and core personal consumption expenditures (the Fed’s preferred inflation gauge), which were now seen as “remain[ing] near” the Fed’s goal of two percent, whereas they were still seen as moving towards that goal as of the June meeting.

The August policy meeting was not accompanied by an update to the Committee’s Summary of Economic Projections, in which the economic forecasts and interest rate projections—the Fed’s “dot plot”—of each Committee member are compiled. Thus, no new information was available to indicate FOMC members’ thinking on the appropriate pace of interest rate hikes. In June, the Committee had noticeably moved up its median interest rate forecast for 2018, indicating that a small majority of its members now expected four rate hikes in total in 2018. While no new data could confirm whether the Fed is still on track for two more hikes—likely in September and December—an important clue could be found by looking at what was not included in the communiqué. In his testimony to the U.S. Congress on 17–18 July, Fed Chairman Jerome Powell declared that “for now, the best way forward is to keep gradually raising the federal funds rate”.

Many observers interpreted this distinction “for now” as a sign the FOMC was worried about the growth outlook in the medium-term, particularly due to rising trade tensions. However, the fact that this distinction was not included in the August FOMC statement signals that Committee members still see the economic outlook as strong and driven by domestic factors, increasing the likelihood they will commit to two more hikes this year. Our panel largely concurs with this assessment: An overwhelming majority of panelists expect the Fed to raise the federal funds rate by 25 basis points at its 25–26 September meeting, to a range of between 2.00% and 2.25%; and they see another rate hike in December.

The U.S. Federal Reserve’s median interest rate projection for 2018 is 2.4%, indicating four interest rate increases this year. Our panel expects the federal funds rate to end 2018 at 2.46%. For 2019, the Fed projects, on average, that the federal funds rate will end at 2.9%. FocusEconomics panelists see the federal funds rate ending 2019 at 3.08%.