The US central bank (Fed) has announced that it aims to raise official interest rates four times this year. It also said it wants to raise interest rates 4 times next year and sees 3 rate hikes in 2020. Interest rates should then remain stable in 2.
The bank is in good shape this year well on schedule. The Fed raised interest rates by 26 basis points to 25% to 2% on Wednesday, September 2,25. That was the third interest rate increase this year. The fourth, scheduled for December, is almost certain.
On the one hand, this has to do with the fact that the American economy is currently doing well and on the other hand, with the political pressure from the White House to increase interest rates. The Fed must now urgently raise interest rates to prevent the financial markets from seeing the bank as a lapdog of US President Donald Trump.
High expectations
It is an understatement to say that the American economy is doing well. Federal Reserve Chairman Jerome Powell put it this way: “Our economy has rarely been in better shape (in key areas) than it is today.” Economic growth (and expectations thereof) is high and interest rates are high unemployment are historically low. Moreover, the Fed is already promising that it will raise the official interest rate very slowly.
And that's a reason for me to think that the Fed will not realize its intentions regarding the number of interest rate increases. Not because I am negative and expect a recession next year (I don't, because I expect high growth in the next 12 months), but simply because the Fed's expectations are so rosy that the chances of them disappointing are high. is larger.
The Fed also expects economic growth to remain above so-called potential growth (the growth rate that the economy can maintain without overheating) through 2021. The bank sees low unemployment falling further and the Fed also expects inflation will not rise further. That's about the best-case scenario anyone can project for the coming years.
Still lower growth?
Since a period of economic expansion between 2 periods of economic downturn (recessions) usually lasts between 8 and 10 years, I think there is little chance that the American economy will continue to run at full speed for almost 3 years. Lower growth (lower than true the Fed assumes) for the coming years would not surprise me.
During the press conference, the chairman was also asked under what circumstances the bank is forced to increase interest rates more often. The journalists also asked under what circumstances the bank will increase interest rates less often.
The refreshing thing about the press conferences from Powell is that these are worth following because he has an answer to every question and that answer is never meaningless. It is in contrast to his European counterpart Mario Draghi, who excels at giving meaningless answers.
The answer?
Powell provided an informative answer to the above questions. The Fed would raise interest rates more quickly if inflation were higher. The Fed would make borrowing more expensive less frequently if economic growth slows, inflation falls or there is a significant and prolonged correction in the financial markets. And with the latter I thought: that is very valuable information.