In this article, we’ll explore why the Federal Reserve is likely to continue with its path of gradual interest rate hikes.
Specifically, we’ll look at the macroeconomic measures that reinforce this approach.
Plus, we’ll also highlight what scenarios could force the Federal Reserve to adjust its monetary policy plans.
After you’ve read this article, you’ll know what to expect from the Federal Reserve in the coming months – and how this could affect the US dollar.
Here’s what the article covers:
- US Monetary Policy
- Key Macroeconomic Metrics
- Other Uncertainties
US Monetary Policy
Since 2015, the Federal Reserve has been in a cycle of gradual interest rate increases. Over that time period, there have been seven rate hikes of 0.25%. The current Fed funds rate sits between 1.75% and 2%.
The US central bank has tightened monetary policy in response to a thriving US economy. As most Forex traders know, interest rates are often hiked to prevent growing economies from overheating.
In 2018, there have been two rate hikes so far. Most economic analysts expect at least one further rate hike this year (some even expect two).
Key Macroeconomic Metrics
However, there has been a change in leadership at the Federal Reserve. In February 2018, Jerome Powell replaced Janet Yellen as the Fed Chair.
Keep in mind that Jerome Powell in President Trump’s nomination. This matters because President Trump has previously stated that he doesn’t favour higher interest rates, as a strong dollar can hurt US exports.
With this in mind, the markets have been monitoring Jerome Powell’s view on the Federal Reserve’s monetary policy. Will it be business as usual, or does President Trump’s view hold weight?
Well, the answer seems to be business as usual.
At a recent economic conference in Wyoming, Jerome Powell stated that the gradual interest rate hikes are still viewed as the best monetary policy path by Fed board members.
The justification for this approach lies in two key macroeconomic metrics.
Firstly, US unemployment is close to record lows, while GDP growth for the last quarter hit an impressive 4.1%. Clearly, such metrics support further interest rate hikes.
US inflation has also picked up recently. Specifically, core inflation has hit its highest level in a decade at an annual rate of 2.4% (July 2018).
This data suggests that two interest rate hikes are likely in 2018, which will strengthen the US dollar further.
As always, unexpected events can change the monetary policy direction of any central bank.
There are two developing events that the Federal Reserve will monitor in the coming months.
Firstly, we have the ongoing US trade negotiations. As we’ve previously detailed, President Trump wants to reduce the US trade deficit by renegotiating global trade deals, including NAFTA. How global trade unfolds will have an effect on the US economy, which is why the Federal Reserve could adjust its pace of rate hikes in response.
Secondly, President Trump is facing political uncertainty in regards to the Russia investigation. This could cause political deadlock in Washington and spook investors that support President Trump’s pro-business agenda. Again, the Federal Reserve could adjust its pace of rate hikes in such a scenario.
Business As Usual For The Federal Reserve (For Now)
In this article, we’ve explained why the Federal Reserve is likely to continue with gradual interest rate hikes.
Particularly, we’ve detailed how record low employment and climbing inflation justify this approach.
In addition, we’ve highlighted how ongoing US trade disputes and President Trump’s political challenges could change the Fed’s monetary policy direction.
If you have a topic that you’d like us to explain, then please type your suggestions in the comments section below.
Please also feel free to ask any further questions too. We read every comment and do our best to respond to your ideas.