Is US Federal Reserve Set To Lift Interest Rates Again?

US

With last interest rate hike in September this year, third such instance of the year, analysts and economists are eyeing keenly over expected rate change announcement by US Federal Reserve this week.

Continued monetary tightening is expected in the upcoming meeting of Federal Open Market Committee. The committee is likely to announce the fourth rate of the year this Wednesday.

With such rate change, Fed targets its monetary policy tool to impact savings rate, loan interest rate, credit card rate and borrowing rate. [optin-monster-shortcode id=”swikrbu1d9j9aq0o4cko”]

This would probably be the ninth hike in last three years when the Fed decided to shift away from its nearly zero interest rate policy regime to combat the ill economic effects of the global financial crisis. The nation’s reserve bank had kept the interest rate almost near zero for a long time to tackle the economic downturn, financial turmoil, collapsing property market and weakening banking sector.

This September, Fed chairperson Jermome H. Powell had raised the benchmark rate by 25 basis points to a range of 2%-2.25%. He signaled more such hikes in future on the grounds of strong economic growth, stable inflation level and strong labour market conditions.  Fed officials indicated at least three rate hikes in 2019 and one more in 2020.

At the Jackson Hole conference earlier this year, Powell supported his monetary tightening stance on the grounds of reduced unemployment numbers and stated inflation to be in a better space to be worried about.

However, there is a broader disagreement towards the future role and direction of Fed’s monetary policy tool.  Some economists are urging the Fed to be more easy-going with frequent rate hike because of the possible economic slowdown on the face of growing US-China cold war. The two nations are in frequent rift for a long time now, slapping consequent import tariffs on each other. There is also growing controversy between the two nations regarding strategic access to the South China Sea and the military and trade dominance.

Market officials and investors are keeping a close eye over any agreement between world’s two significant giants the US and China in the upcoming G20 summit.

Powell also faces harsh criticism from President Donald Trump on the stricter use of monetary policy by FOMC officials.

Anticipating shrinking economic growth in long-term, several experts are recommending strict monetary policy to be adopted by Federal Reserve officials. The impact of tariffs on imported Chinese consumers on domestic inflation and growth slowdown cannot be under-estimated. An additional interest rate rise results in further inversion of the yield curve, and a further step towards the US recession.

Having said that a further rate hike is expected this week on the grounds of sound economic data and Fed’s September forecast of the rate hike. As per recent BIS (Bureau of Labour Statistics) data, the unemployment rate remained stable at 3.7 percent consecutively for the third month in November. Over the year, the unemployment rate declined by 0.4 percentage point this year. US economy reported a stable and above expectations growth rate of 3.5% in Q3 2018.

While the market is all glued on how the rate scenario unfolds in the near term, any anticipated climacteric in the hike trend is something that is to be seen in 2019.


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