As had been widely predicted, the Federal Reserve decided to increase its interest rate by 0.25% during its March meeting. The move places US interest rates in a band from 1.5 to 1.75% which is still very low by historic standards. The long-term average interest rate in the USA is 5.73% (range 0.25% (Dec 2008) to 20% (Mar 1980)).
The move opens up the range of interest rates paid by major central Banks: ECB 0%; Bank of England 0.5%; Bank of Japan -0.1%; Bank of Canada 1.25%; Reserve Bank of Australia 1.5%. If you fancy a punt, the Central Bank of Brazil is offering 6.5% or the Bank of Russia is offering 7.5%.
The Fed has indicated that it expects two further (0.25%) interest rate hikes this year, with faster rises in the pipeline in 2019. The Federal Open Markets Committee, which sets the rate, expects US growth to be stronger than predicted this year, edging up the growth projection from 2.5 to 2.7%.
The Federal Reserve Chairman, Jerome Powell, warned that a US trade war would pose a risk to the outlook for the US economy. The US President announced that tariffs would be levied on imports of steel and aluminium products, risking retaliatory tariffs on US exports to countries affected.
Currently, US inflation is running at 2.2% (for the year to February) which is slightly above the Fed’s target of 2%. An upside worry for inflation could be wage rises against a backdrop of near full employment (4.1%). The Fed is “alert” to the risk of higher inflation, but does not anticipate a rapid increase. Powell noted: “There’s no sense in the data that we’re on the cusp of an acceleration in inflation”. Normalisation of interest rates from ultra-low accommodative values means that the Fed would have the option of lowering rates to boost the economy. Increasing rates is likely to choke off inflation by tightening the money supply, but this only works if the increased rate has a significant effect on the cost of borrowing. Commercial real estate loans in the US stand at 4 to 5% whereas personal loans (for those with good credit ratings) are in the range from 5.3 to 7.4% depending on source and duration.