The state of the US economy is as follows: growth is strong and stable, the labor market is doing well, unemployment is low, consumers are spending more and companies are investing more. The only thing missing is inflation. It is still below 2% to 2,5%, the percentage that the Fed would like to see.
That was the reason why the central bank left the official interest rate at 1,5% this week. However, there is a very good chance that this will be different in March, when the interest rate committee meets again.
Increases expected
The bank expects that economic growth will remain high and that inflation will rise towards 2% in the near future. The Fed therefore believes that a gradual increase in interest rates will be necessary. Assuming that the labor market continues to function as in recent months and years and that American consumers do not suddenly start saving en masse, the Fed will increase the official interest rate to 1,75% in March.
A second interest rate increase in the summer is therefore very likely. If the American economic engines continue to run at full speed and inflation continues to rise, the Fed will have a great opportunity to deliver on the promise of 3 rate hikes in 2018. I would be surprised if the bank didn't take advantage of that opportunity.
This is because the room for interest rate increases could simply disappear after the summer. With the parliamentary elections in the United States (in the fall) and the chance of some headwind for world economic growth, it would not surprise me if the Fed says at that time: “We are fine with 2 interest rate increases, we will now first look at how the economy absorbs those interest rate increases.” So in my view the third interest rate increase is a question mark.
Financial markets
The Fed's rather clear announcement that it wants to raise interest rates has had an impact on the financial markets. US 10- and 30-year yields have risen to almost 3%. That is the highest level in almost 4 years. That upward pressure could continue for the time being and that could prevent the third interest rate increase. Stock prices fell almost simultaneously with rising long-term interest rates.
Now, any fall in those rates is of course not a disaster, but if the decline continues, there is a good chance that it will have negative consequences for the confidence of American consumers in the economic future. Something on which he might spend less, which in turn would hit prospects for economic growth.
For all these reasons, I expect the Fed to continue to keep a close eye on developments on the stock markets and, if necessary, to intervene. For example, by not increasing the interest rate 3 times. I don't see long-term interest rates dropping much. Continued economic growth and inflation will prevent that.