As noted in today's interest rate video, Friday, September 22, the Fed has reiterated its intention to raise interest rates one more time this year, in December. What are the consequences?
The interest rate increases of the Fed (American Central Bank) depend on economic developments. In recent weeks, large economic areas of the United States have been hit by powerful storms, causing hundreds of billions of dollars in damage.
We know from the past that this damage becomes visible in macroeconomic figures, which are regularly published. For example, inflation will temporarily rise further because petrol prices are higher. This also applies to the prices of food. Unemployment may also increase temporarily and the number of new jobs will be lower. And economic growth in the quarter in which storms occur generally turns out to be lower.
Ignore
Higher inflation and lower economic growth could derail the Fed's plans for this year? At first glance the answer seems to be 'yes'. However, Fed Chair Janet Yellen said clearly this week that the plans will not be affected by the consequences of the storm.
According to Yellen, the Fed will view any setback in the figures as a temporary factor, because past experiences teach the bank that the negative consequences are limited to 1 or 2 quarters. And the bank does not react to temporary factors, it looks through them, as it were.
In short: there is a good chance that in the coming weeks and months we will encounter reports that fewer jobs have been created, economic growth is lower and unemployment is rising slightly. However, none of this will have any impact on the path the Fed has taken.
Even if inflation in the United States increases slightly, it would be incorrect to conclude that the Fed will increase interest rates more quickly. The American bank will also ignore this. This also applies when inflation remains low. It has fallen in recent months and is now considerably below the Fed's target rate of 1,5% depreciation. That is 2% to 2,5% per year.
Temporary factors
However, Chairman Yellen said that inflation that is too low is not a source of concern. The bank sees the decline in recent months as something that is due to a number of one-off factors and which will therefore blow over quite quickly.
In short: we should ignore the possibly weaker figures. The Fed will too. This is also one of the reasons why it is likely that the bank will increase the official interest rate in December. Such as in one recent interest video has been explained, the Fed will be putting a lot at stake if the bank does not change monetary policy against a backdrop of strong growth and the disappearing threat of deflation.