Federal Reserve delivers a second interest rate hike to 1.75%-2% and then expects more rate increases in late-2018.

Charlene Vos

2018-06-08 13:35:00 Fri ET

The Federal Reserve delivers a second interest rate hike to 1.75%-2% and then expects subsequent rate increases in September and December 2018 to dampen inflationary pressures. This decision reflects robust economic revival in America. With sound price stability, the U.S. economy now operates near full employment with 2.1% inflation and 3.8% unemployment (i.e. the lowest unemployment rate since 2000). The current real economic growth trajectory accords with the Federal Reserve's dual mandate of maximum employment and price stability.

The Federal Reserve pencils in subsequent interest rate hikes later in 2018 (2%-2.25% in September 2018 and then 2.25%-2.5% in December 2018). This gradual acceleration of interest rate increases helps contain inflation with steady gains in the labor market. The current interest rate hike might disappoint President Trump who would otherwise prefer dovish monetary policy accommodation (in contrast to hawkish inflation containment).

However, the Federal Reserve reiterates monetary policy independence and thus continues the current interest rate hike as the U.S. economy moves along the long-run steady-state economic growth path of healthy fundamental recalibration. On balance, it is now quite plausible for America to achieve 3%+ real GDP economic growth to better balance the U.S. fiscal budget that helps neutralize both trade and budget deficits in the medium term.

 


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