28 September 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Source: US Federal Reserve
*PCE - Personal Consumption Expenditures
The Federal Reserve (Fed) raised US interest rates by 0.25% to a new 2% to 2.25% range at September’s meeting. This is the eighth US interest rate rise since December 2015. The primary reason given for higher interest rates is that the US economy is “strong”. US economic growth was above 4% in the June quarter while the unemployment rate is below 4%.
The Fed has also provided guidance that US interest rates should continue to rise with another 0.75% increase projected in 2019 and a further 0.25% in 2020 (dotted blue line). This projected path has been described by the Fed as involving only “gradual” rises in interest rates towards 3.4%.
However the Fed’s guidance is not a guarantee that future US interest rate rises will be gradual. US inflation risks are also building as seen in higher US wages growth and rising oil prices. The US annual inflation rate (red line) was running at 2% in July as measured by the core Personal Consumption Expenditures deflator. For both borrowers and investors, this projected “gradual” climb in interest rates could actually become more forceful should US inflation pressures accelerate. Both Main Street and Wall Street need to be mindful that the Fed’s “gradual” may turn out to be rather painful.
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