Unchanged. That was the verdict of the Fed's Interest Rate Committee yesterday evening (May 3). The Interest Committee considered the official interest rate in the United States. Does June bring a different message, namely higher interest rates?
When the Fed decided to increase interest rates by 0,25 percentage points in March, the Fed also indicated that it wanted to make borrowing money twice as expensive over the course of this year. The bank stuck to that promise this week, so the market is now expecting an interest rate increase in June and one in December. Although economic growth in the US was considerably lower in the first quarter than in the final months of last year, the Fed expects the slowdown in growth to be a temporary effect.
In addition, the American economy will grow faster in the rest of this year. The market quickly concluded that the next interest rate increase in June is not yet off the table.
The above tells us that growth will be crucial for the Fed's further monetary policy. If the bank turns out to be right about the fact that the cooling in the first 3 months of 2017 was indeed temporary, then 2 more interest rate increases are possible this year.
However, if the Fed turns out to be too optimistic and the growth slowdown lasts longer than 1 quarter, then at most 1 interest rate increase this year is the maximum that can be expected from the Fed. For a number of reasons, it would not be surprising if the Fed does not tighten monetary rules further in June and official interest rates in the US increase at most once this year.
Estimates
The US Bureau of Statistics publishes 3 estimates of economic growth for each quarter. What is known so far regarding the first quarter of this year is only the first estimate. And it is based on a very limited number of hard figures.
The second figures will be announced on May 26 and the third estimate on June 29. By then, American statisticians will have many more underlying figures.
When we talk about US growth figures, I always think of a structural deviation. Over time it has become apparent that the statistical office in Washington often presents growth too rosy. The second and third estimates often show that growth has been considerably lower than initially reported.
The Fed knows that too and it wouldn't surprise me if the bank waits for more definitive figures for the first months of this year. If it turns out that the US economy is off to a fairly slow start this year, the only way to determine why is to see what its performance will be in the second quarter. The first estimate on this is scheduled for July 28, 2017.
In addition, there are already indicators that indicate that the slowdown in growth at the beginning of this year is more than temporary.
Traffic light on orange
The monthly survey (the ISM Non-Manufacturing Survey) among service sector managers shows that the sub-index, which reflects employment developments, has continued its fall. That doesn't bode well for the amount of new jobs that will be created in the United States in the coming months.
Knowing that the number of new jobs in March was considerably lower at 98.000, and given the fact that the further strengthening of the labor market is about the main reason for the Fed to be optimistic about economic growth, it could just be that the American labor market is now performing less well. Time will tell and that is exactly my argument why we should take into account an unchanged interest rate in June.
Ask yourself the question: 'Will the Fed, as uncertain as it is, first want to examine the situation further to gain more certainty or continue to raise interest rates without clarity (with the chance that economic growth could be further curtailed)?'
Development of American inflation
In all this, we should not lose sight of the development of American inflation. The Fed's favorite inflation measure, the so-called PCE index, fell to 1,6 percent in March. That is quite a way from the bank's target rate, which is an annual increase of around 2,5 percent.
This decline in inflation, the chance that this decline can continue and the great uncertainty about whether the slowdown in growth in the first 3 months of this year is a temporary phenomenon or not, will probably be the reasons for leaving interest rates unchanged . In any case, I will be surprised on June 14 if Fed Chair Janet Yellen announces that.
Perhaps she will even gently hint that interest rates will only rise once more during the rest of the year. The possible prospect of fewer interest rate hikes is likely to be music to the ears of equity investors.