The US Federal Reserve increased the US interest rate by 0.25% overnight, marking the second increase in 2018. The Fed’s officials said to expect another two increases in 2018, not just one increase as some people were expecting.
The US Fed is similar to the Reserve Bank of Australia, it sets the interest rate based on the current and projected near-term economic conditions.
Unemployment has continued to drop under President Trump’s Administration. US unemployment has now fallen to 3.8% and the Fed hopes it could drop to 3.6% by the end of year. As a comparison, the Australian unemployment rate is currently above 5%.
The Fed raised its economic growth forecast to 2.8%, which was up a small amount from its projection of 2.7% earlier in the year.
Mr Jerome Powell, Chairman of the Fed, said: “The main takeaway is that the economy is doing very well. Most people who want to find jobs are finding them, and unemployment and inflation are low.”
Aside from worries about potential trade wars, Mr Powell couldn’t foresee any imminent danger. The Fed had heard from some businesses that they may hold off investing whilst there is uncertainty surrounding trade conditions.
It’s possible the Fed may raise rates another three or four times by the end of 2020. It is trying to find the balance of raising rates to combat inflation, without going too fast and spooking consumers and businesses.
However, some market analysts are saying that the values of assets like shares or property are likely to come down.
Low interest rates boost asset values whilst higher interest rates supposedly harm asset values.
Overnight, the Dow Jones finished the day down 0.47% in response to the Fed’s announcement.
The one part of the data that the Fed didn’t quite understand was that wage growth was limited, but Mr Powell predicts that wages will grow.
You’ll see wages go up. You’ll see people at the sort of margins of the labor force having an opportunity to get back into work. – Powell
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